What happened
Shares of Qualcomm (QCOM 1.04%) were rallying on Friday, up more than 3.3% on a day when the Nasdaq Composite actually finished slightly in the red.
Qualcomm has been attempting to diversify its business into automotive and Internet of Things chips in recent years, but it still gets the lion's share of revenue and earnings from its dominant mobile modem chipset business and technology licensing for mobile phones.
While the global handset industry has been in the doldrums for the past year following the pandemic boom, one Wall Street analyst initiated a report today on Qualcomm with a more optimistic outlook.
So what
On Friday, Wolfe Research initiated coverage of Qualcomm, giving the stock an outperform rating and $145 price target, compared with a $121 stock price at the start of today's trading.
Wolfe's take is that the handset market is at or near a trough of the down cycle that has plagued most chip companies over the past year. Qualcomm, for its part, has been shipping even fewer chips to device makers than what end customers are actually consuming, because too much inventory had built up last year when demand evaporated. In its most recent quarter, Qualcomm's mobile handset chip sales declined by a whopping 17% year over year. By comparison, research firm Canalys estimates global handset sales were also down year over year, but by a lower 11%.
However, with inventories now at a more normalized level, any uptick in device purchases could lead to a strong bounce-back -- or at least, that's Wolfe's take. Analysts at Canalys also believe a recovery is in the cards, after six straight quarters of year-on-year declines for global smartphone shipments.
Chip companies can see highly volatile results, as their sales not only depend on end market consumption of phones, PCs, servers, and other devices, but also what the device makers choose to do with inventory. When the market is declining, vendors sell less and stop purchasing inventory. On the other hand, when markets are growing and optimistic, sales grow and device makers look to get their hands on more inventory to take advantage of anticipated demand. Therefore, chipmakers can see higher variability in results.
So those disheartened by Qualcomm's double-digit revenue declines in recent quarters could potentially be in for a pleasant recovery in the quarters ahead.
Now what
While many agree that the consumer electronics device market, including handsets, may be bottoming, the speed and slope of the recovery is still highly unclear.
In recent days, Qualcomm's main foundry for its high-end chips, Taiwan Semiconductor Manufacturing, actually gave fairly cautious guidance for the rest of 2023, taking down its projections for foundry growth while pointing to a weak Chinese recovery and ongoing caution on the part of OEM vendors regarding building inventory.
So while Qualcomm may see bottoming in mobile chip sales, its growth from here may be hampered until inflation comes down and fears of a global recession pass. That being said, Qualcomm has an undemanding valuation, and should remain a fairly safe and cheap dividend growth stock for the foreseeable future.
