Qualcomm (QCOM -0.94%) seems to have missed out on the buying spree that lifted the share price of so many other tech stocks in the first half of the year. Since early January, Qualcomm stock has risen 12%, well under the average S&P 500's gains of around 19%, and even further behind the tech-heavy Nasdaq Composite's 38% average rise.
Given that the company is the market leader in 5G smartphone chipsets, its lackluster share price performance may perplex investors. Three facts explain why Qualcomm is in a rut, but they also point to what could get it out of that situation over time.
1. Qualcomm is the likely victim of slow chip sales
Despite the company's technical prowess and the ongoing 5G upgrade cycle, Qualcomm's stock has failed to gain traction. The stock is down over the last year, and one has to go back five years to find a stretch of time in which it was beating the S&P 500.
According to industry analysis firm Counterpoint, consumers bought 280 million smartphones in the first quarter of 2023. An enormous number, yes -- but nonetheless, down 14% year over year. Amid an uncertain economic climate, consumers seem more reluctant to spend on smartphones. Additionally, China, which accounted for almost two-thirds of Qualcomm's revenue in fiscal 2022, faced zero pandemic-related lockdowns in major metropolitan areas for much of that year.
Given that smartphone-related sales are Qualcomm's largest revenue source, the slowdown in that segment naturally cut into how investors value the stock. Given the constantly evolving technology and people's need to upgrade their smartphones periodically, that sales slowdown is unlikely to last.
2. Qualcomm is diversifying
What could last long-term are changes in the ways we use Qualcomm's technology. For example, many functions now performed largely by smartphones may switch to other devices.
Qualcomm has prepared for such an occurrence, anticipating some of these changes and entering the fast-growing artificial intelligence (AI) market. This may be useful as well for its move into the automotive market through its digital chassis, which offers communications capabilities and driver assistance.
Also, to that end, it has gone deeper into Internet of Things (IoT) chips. Among its projects is developing the chips that power the Oculus VR headsets made by Meta Platforms. It has also developed an IoT-as-a-service suite platform that offers plug-and-play solutions for many IoT-related issues, making integration easier.
3. Qualcomm's low valuation limits the downside risk
Even with the potential for Qualcomm's continued success, the stock trades at a price-to-earnings ratio of about 13 -- the lowest earnings multiple of any of the major semiconductor companies.
QCOM PE Ratio data by YCharts.
Admittedly, the aforementioned revenue and profit slumps and dependence on China are likely reasons for that low valuation. Moreover, Taiwanese chipmaker MediaTek provides it with some competition, particularly on the lower end. Given the current headwinds, investors should not expect an immediate recovery.
However, Qualcomm's revenue should begin to recover next year. Also, considering its technology in the IoT and automotive fields, growth should resume eventually.
Consider Qualcomm stock
Despite its recent performance and the slowdown in global smartphone sales, Qualcomm still looks like a solid long-term buy.
It's true that lower smartphone sales, heavy China exposure, and a shifting industry bring considerable uncertainty. Nonetheless, the semiconductor company has made preparations to accommodate its changing industry. Also, its current low valuation should limit further downside, even if sales take time to recover.
