If you bought shares of Qualcomm (QCOM 1.45%) any time over the past year, you are likely very disappointed in your returns. The chip maker faced several challenges across 2022, including a shortage of crucial components as well as reduced demand for its wireless chips due to the economic downturn and sustained COVID-19 restrictions in China.
Industry professionals predict that decreased demand for wireless chips will continue throughout 2023 and only begin to recover in 2024. As a result, many investors have lost interest in the stock, causing it to underperform compared to the overall market.
Despite that bleak short-term outlook, now is the time for long-term investors to start considering shares of Qualcomm. Here's why.
AI should help drive growth
While ChatGPT may have garnered attention for its impressive artificial intelligence (AI) capabilities and potential to change internet searches, other generative AI models are available that are equally powerful, such as Stable Diffusion, DALL-E, Bard, VQGAN+CLIP, and more that also have the potential to revolutionize entire industries.
However, the potential of many advanced AI models is limited as long as the algorithms are restricted to running in the cloud. Some disadvantages of running AI models in the cloud are:
- Latency: Latency refers to the time it takes for an AI system to respond to a request. Running AI models on a cloud service will introduce delays, possibly making the application unresponsive.
- Security: Cloud services may not be as secure as local devices due to the algorithms' exposure to the internet.
- Cost: AI cloud services can be expensive, primarily if many users use the application.
To fully utilize advanced generative AI algorithms, it's best to run them on local devices as this reduces delays, resulting in a more responsive application.
Second, developers can personalize AI models better if the algorithms are run on local devices as this gives the model access to more data about the user, such as their location, browsing history, and search history, to improve the model's predictions and recommendations.
Lastly, running algorithms on a local device can increase security and privacy because the data used to train and run the AI model remains on the device and not on a remote server, meaning that the data is not accessible to third parties, such as advertisers or government agencies.
For all of the above reasons, Qualcomm believes that bringing computation and data storage for AI algorithms closer to end users, rather than running the AI model in a remote cloud service, presents a significant opportunity.
During the Mobile World Congress event in Barcelona in February 2023, the company showcased the first use of a generative AI model on a mobile device. The company's CEO, Cristiano Amon, said this about the demonstration: "Qualcomm is uniquely positioned to enable the proliferation of AI use cases on edge [local] devices. We're advancing AI to make core on-device capabilities ubiquitous such as perception, reasoning, action, and now, content creation."
So far, Wall Street has ignored the company's opportunity in enabling the use of AI locally on devices such as phones, laptops, watches or Internet of Things devices.
The company faces multiple risks
Qualcomm faces many risks to its dominance in wireless technology, the most significant being intense competition from other chipmakers, such as MediaTek and Samsung. These companies invest heavily in wireless technology and could eventually challenge its dominance. Additionally, it will likely lose its most significant customer over the next several years as Apple brings production of the components it currently buys from Qualcomm in-house.
The wireless technology industry constantly evolves, and Qualcomm could adapt slowly to new technologies, leading to the loss of market share to competitors. For example, it is dominant in 5G, but it could be slow to adapt to 6G technology, which is still in its early stages of development. So, if you choose to invest in this company, you must remain mindful of these risks.
The market undervalues the stock
On the positive side, Qualcomm stock is very reasonably valued today, trading at a price-to-earnings (P/E) ratio of about 13. That's near its lowest level in the past five years, as seen in the chart below.
QCOM PE Ratio data by YCharts
Additionally, Qualcomm's valuation based on a P/E ratio and price-to-sales ratio pales in comparison to other semiconductor companies that should benefit from the proliferation of AI, like Nvidia and Advanced Micro Devices.
QCOM PE Ratio data by YCharts
Nvidia and AMD are great companies with solid revenue growth potential from AI, but the market overvalues both stocks. However, Qualcomm's revenue growth potential in a mobile phone market that should recover in 2024, combined with growth that should come from its new initiatives in the Internet of Things, automotive, and AI on edge devices, has yet to be fully reflected in its valuation.
Investors should remember that a recession is still on the table in a market environment where the Federal Reserve intends to raise interest rates later this year. Should a recession happen, Qualcomm has much less downside than its semiconductor peers.
Suppose you are looking for an excellent growth investment with a minimal downside in the case of an economic downturn. In that case, this wireless semiconductor company is worth adding to your list of investment options.
