Where Will Qualcomm Stock Be in 1 Year?

Qualcomm's (QCOM 1.04%) stock fell 6% on May 4 after the mobile chipmaker posted its latest earnings report. For the second quarter of fiscal 2023, which ended on March 26, its revenue declined 17% year over year to $9.27 billion, but beat analysts' expectations by $148 million. However, its adjusted earnings dropped 33% to $2.15 per share and missed the consensus forecast by $0.01 per share.

Qualcomm's gloomy numbers weren't surprising, since the entire semiconductor sector is currently grappling with a cyclical slowdown, but the stock's 20% decline over the past 12 months already reflects a lot of that pessimism. Could this out-of-favor chip stock finally attract some value-seeking investors and bounce back over the next 12 months?

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Understanding Qualcomm's business

Qualcomm is one of the world's leading producers of system on chips (SoCs), which combine a CPU, GPU, and baseband modem in a single package, for mobile devices. It also sells stand-alone modems to Apple, which accounted for more than 10% of its revenue in fiscal 2022, as well as other smartphone makers.

Qualcomm generated 86% of its revenue from its chipmaking division in the second quarter. The other 14% came from its licensing segment, which leverages its massive portfolio of wireless patents to take a cut of every smartphone sold worldwide.

Qualcomm has been trying to diversify its business away from the saturated smartphone market with new automotive and Internet of Things (IoT) chips. But handset chips still accounted for 77% of its chipmaking revenue in the second quarter, so its fate will remain tightly tethered to the smartphone market for the foreseeable future.

Qualcomm also relies heavily on its higher-margin licensing division to offset the lower margins of its chipmaking business and drive its profit growth. But most of that revenue still comes from smartphones instead of automotive or IoT chips.

Tracking Qualcomm's cyclical downturn

Qualcomm experienced a major growth spurt in 2020 and 2021 as smartphone makers made the leap from 4G to 5G devices. Apple's launch of the iPhone 12, its first family of 5G devices, in late 2020 also generated strong tailwinds for Qualcomm. However, the company lost its momentum in 2022 as it lapped that upgrade cycle. Inflationary headwinds, the Ukrainian war, and intermittent COVID-19 lockdowns in China exacerbated that slowdown.

Those headwinds caused global smartphone shipments to drop 11.3% to 1.21 billion units in 2022, according to IDC, representing the industry's lowest number of annual shipments since 2013. The research firm expects that slowdown to continue, with another 1.1% decline in 2023. That's why Qualcomm's growth slowed to a crawl over the past year.

Non-GAAP basis. YOY = year over year.

At the start of fiscal 2023, the bulls had hoped Qualcomm would finally reach its cyclical trough and recover. Unfortunately, the company's declines deepened in the first half of fiscal 2023, and it expects that slowdown to worsen with another 19% to 26% year-over-year drop in revenue in the third quarter. Analysts had expected a milder 17% slump.

During the conference call, CEO Cristiano Amon warned that the "evolving macroeconomic backdrop has resulted in further demand deterioration, particularly in handsets, at a magnitude greater than we previously forecasted." Amon also said Qualcomm hadn't seen a "meaningful recovery" in China's post-COVID-19 market yet, and its chip inventories would likely remain elevated "for at least the next couple of quarters."

Furthermore, Amon expects Apple to replace Qualcomm's modems with its own first-party modems by 2024. That switch could take a big bite out of its revenue and hamper its cyclical recovery.

Focusing on the factors it can control

As Qualcomm braces for a near-term slowdown, it plans to cut costs, repurchase more shares to boost its EPS, and expand its portfolio of automotive and IoT chips to reduce its dependence on smartphones.

But its margins are still under pressure. In the second quarter, its chipmaking earnings before taxes (EBT) margin dropped year over year from 35% to 27%, while its licensing EBT margin declined from 73% to 68%.

For the third quarter, it expects its chipmaking EBT margin to come in between 23% and 25%, and for its licensing EBT margin to land between 64% and 68%. Therefore, its margins are still slipping -- and it's unclear when they'll bottom out.

On the bright side, Qualcomm is still returning a lot of cash to its investors. It bought back $903 million in shares and paid out $834 million in dividends during Q2, and it hiked its quarterly dividend by 7%. It currently pays a forward dividend yield of 2.7%, and its stock looks fairly cheap at 13 times forward earnings.

Where will Qualcomm be in a year?

Qualcomm's downside potential is limited at these levels, but I think it will trade sideways and struggle to stage a comeback over the next 12 months. It still faces too many near-term challenges, and there's no clear sign that it has hit rock bottom yet. Investors should stick with other promising tech stocks until Qualcomm's prospects improve.