Where Will Qualcomm Stock Be In 1 Year?

Qualcomm (QCOM 1.62%) posted its latest earnings report on Feb. 2. In the first quarter of fiscal 2023, which ended on Dec. 25, the chipmaker's adjusted revenue dropped 12% year over year to $9.46 billion and missed analysts' expectations by $110 million. Its adjusted net income fell 27% to $2.68 billion, or $2.37 per share, but topped estimates by two cents.

Qualcomm clearly faces a cyclical slowdown along with the broader semiconductor sector, but its stock has already dropped nearly 30% over the past 12 months. It also looks cheap at just 13 times forward earnings and pays a decent forward dividend yield of 2.2%. Could this out-of-favor tech stock recover by the end of 2023?

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Why is Qualcomm facing a cyclical slowdown?

Qualcomm is one of the world's largest producers of system on chips (SoCs) -- which bundle together central processing units (CPUs), graphics processing units (GPUs), and baseband modems -- for smartphones, tablets, and other devices. Moreover, its massive portfolio of wireless patents entitles it to a cut of all the smartphones sold worldwide, even if they don't use Qualcomm's SoCs.

Therefore, Qualcomm's growth is tightly tethered to the smartphone market, which experienced a multi-year growth spurt when fresh 5G devices hit the market from 2019 to 2021. But that upgrade cycle is ending, and intermittent COVID lockdowns in China and inflationary headwinds have exacerbated that slowdown over the past year.

Qualcomm is producing more chips for the automotive and Internet of Things (IoT) markets to reduce its dependence on the mobile market, but it still generated 73% of its chipmaking revenues from the handset market in the first quarter. It repeatedly touts the growth of its automotive and IoT businesses, but those smaller segments still can't offset its slowing sales of handset chips. That's why its streak of double-digit revenue and profit growth ended abruptly in the first quarter.

Source: Qualcomm. Non-GAAP basis. YOY = Year-over-year. 

Qualcomm's margins also shrank as its growth cooled off. In the first quarter, the chipmaking segment's pre-tax profit margins fell seven percentage points year over year to 28%, while the licensing segment's pre-tax profit margins dropped four percentage points to 73%. That pressure will likely continue until the smartphone market stabilizes.

In the second quarter, Qualcomm expects its revenue to decline 15% to 22% year over year as its adjusted EPS drops 30% to 36%. But like many other chipmakers, Qualcomm expects the broader market to stabilize in the second half of 2023 as the supply/demand balance is restored.

What will Qualcomm do until the market stabilizes?

During the conference call, CEO Cristiano Amon said: "Given the current macroeconomic and demand environment, we're implementing further spending reductions and streamlining operations without losing sight of the significant growth and diversification opportunities ahead." In other words, Qualcomm will continue to cut costs, repurchase more shares (it bought back $1.3 billion in shares in the first quarter alone), and expand its automotive and IoT chipmaking businesses.

Those efforts could make it a more diversified chipmaker like Texas Instruments (TXN 2.35%) over the long term, and also prepare Qualcomm for its potential loss of Apple (AAPL 0.51%) as a top customer. Apple reportedly plans to replace Qualcomm's baseband modems with its own chips by 2025.

For now, analysts expect Qualcomm's revenue and adjusted earnings to decline 9% and 18%, respectively, for the full year. But in fiscal 2024, they expect its revenue and adjusted earnings to rise 12% and 18%, respectively, as the cyclical headwinds dissipate. There might not be too many compelling reasons to buy Qualcomm right now, but its low valuation and decent dividend yield should limit its downside potential as the bear market drags on.

Where will Qualcomm's stock be in a year?

I expect Qualcomm's stock to tread water for the first half of the year as the smartphone market stays chilly. But in the second half, its stock could perk up again as the mobile market warms up and a fresh bull market brings back more investors. In short, I wouldn't be surprised if Qualcomm's stock rises higher by the end of the year.