Technology stocks have been in fine form in 2023 thanks to the emergence of artificial intelligence (AI) as a major catalyst for this sector. This is evident from the 42% surge in the Nasdaq-100 Technology Sector index.
However, not all tech stocks have benefited from this rally. Qualcomm (QCOM 0.85%), with year-to-date gains of just 7%, has massively underperformed the broader technology sector in 2023. What's more, shares of the semiconductor giant are down nearly 11% in the past year. And it isn't difficult to see why.
The smartphone slowdown is hurting Qualcomm
Qualcomm's woeful share price performance isn't surprising. It controls close to 30% of the smartphone chipset market, and a slowdown in smartphone sales has led to a sharp decline in the company's revenue and earnings.
The chipmaker's revenue in its fiscal 2023 second quarter (which ended March 26) was down 17% year over year to $9.3 billion. Its adjusted earnings crashed 33% year over year to $2.15 per share.
The 15% year-over-year decline in smartphone shipments in the first quarter of calendar 2023 explains why investors have been losing their taste for Qualcomm. Global smartphone sales are expected to contract this year, and Qualcomm could continue to struggle until that market begins to rebound.
Market research firm IDC forecasts a 3.2% drop in smartphone shipments in 2023 to 1.17 billion units. However, shipments are expected to recover in the long run, and increase to 1.35 billion units by 2027, which explains why analysts expect the company's performance to improve in the next fiscal year and beyond.
Analysts are projecting Qualcomm's revenue in its fiscal 2023 to decline by 18% to $36 billion. Its adjusted earnings could shrink to $8.31 per share from $12.53 per share in fiscal 2022. But a potential recovery in global smartphone sales in 2024 is expected to benefit Qualcomm's financials.
QCOM Revenue Estimates for Current Fiscal Year data by YCharts.
However, Qualcomm's growth is predicted to be tepid over the next couple of fiscal years, suggesting that even a smartphone sales rebound may not be enough to lift the stock out of the rut. But there is one potential catalyst that could bring Qualcomm shares out of the doldrums -- AI.
AI could unlock a new growth opportunity for the company
The slow expected growth of the global smartphone market in the long run explains why Qualcomm is expected to deliver muted growth. In fact, analysts are anticipating the company's bottom line to decline at an annual rate of 10% over the next five years, which is a big contrast over the 37% annual growth it delivered in the last five.
So Qualcomm is badly in need of a new growth driver. The automotive business could prove to be one, given that the company has already built a solid design win pipeline in the space.
Qualcomm's automotive revenue was up 20% year over year in the second quarter to $447 million. But this business produces just 5% of its top line at present. It may not be enough to move the needle in a big way for the company on its own.
This is why Qualcomm is exploring opportunities in the fast-growing AI market. CEO Cristiano Amon highlighted the company's AI opportunity on the May earnings conference call. Amon noted that "generative AI models such as ChatGPT, Stable Diffusion, and DALL-E have already scaled to millions of users in a short period of time," but he believes that such models "will need to run locally on devices at the edge" (such as smartphones) if they are to realize their true potential.
Large language models that power generative AI applications are currently trained in the cloud using powerful chips such as graphics cards. AI inferencing, which puts the trained models to work delivering output, is also done in the cloud at present.
However, Amon predicts that part of this workload will eventually be offloaded to devices such as smartphones. According to Amon:
A hybrid AI architecture leveraging accelerating computing at the edge can offload or support cloud processing by running AI inferencing directly on the device. Beyond cost optimization, additional benefits of running generative AI on-device include improved latency, security, privacy, and the ability to meet data compliance requirements. This is a new and exciting opportunity for Qualcomm in one of our priority investment areas.
So mobile could become a fast-growing niche within AI. Mordor Intelligence estimates that the mobile AI market could clock an annual growth rate of 29% through 2028, and that's going to drive demand for processors capable of running AI applications on the edge.
Moreover, the edge AI market is expected to generate annual revenue of almost $67 billion in 2030, growing at an annualized rate of 21% through the end of the decade thanks to growing implementation in smartphones, Internet of Things devices, and autonomous vehicles.
Given that Qualcomm is targeting all these markets, it may be able to make the most of the edge AI opportunity. More importantly, Qualcomm showcased in February that the popular generative AI model Stable Diffusion -- which turns text prompts into images -- can be run on a smartphone.
The chipmaker pointed out at that time that Stable Diffusion runs using more than 1 billion parameters. And now, Amon said Qualcomm is working to "significantly improve performance and be able to run models in excess of 10 billion parameters locally on the device, and we will increase this capability substantially for our products in 2024."
Investors would do well to keep an eye on Qualcomm's progress in AI since this technology could kick-start the beaten-down semiconductor stock's growth.
