Is Qualcomm Stock a Buy Now?

Qualcomm's (QCOM 1.12%) stock price sank 7% during after-hours trading on Wednesday, Aug. 2, following the mobile chipmaker's latest earnings report. For the third quarter of fiscal 2023 (ended June 25), its revenue dropped 23% year over year to $8.44 billion and missed analysts' estimates by $70 million. Its adjusted earnings also fell 37% to $1.87 per share but cleared the consensus forecast by $0.06 per share.

Qualcomm's declines weren't surprising given it's heavily exposed to the cyclical slowdown of the smartphone market. But should investors consider picking up some shares of this unloved chipmaker before the smartphone market recovers?

Image source: Getty Images.

How long will Qualcomm's cyclical downturn last?

Qualcomm's QCT (chipmaking) revenue, which accounted for 85% of its top line, fell 24% year over year in the third quarter. Most of that decline was caused by a 25% drop in its handset chip sales (73% of its QCT revenue) as the 5G upgrade cycle ended and it faced tougher competition from MediaTek in the low-range and mid-range markets.

Qualcomm's Internet of Things (IoT) chip sales (21% of its QCT revenue) also slumped 24% as the macro headwinds throttled the market's demand for its networking, industrial, and consumer IoT chips. Its automotive chip sales (6% of its QCT revenue) rose 13% due to the auto market recovering, but the growth of that tiny segment couldn't offset its other weaknesses.

Qualcomm's QTL (licensing) revenue, which accounted for 10% of its top line, fell 19% year over year. This higher-margin segment leverages its massive portfolio of wireless patents to take a cut of every mobile device sold worldwide (even those that don't use Qualcomm's chips), so its sales also withered as the growth of the global smartphone market cooled off. All of those headwinds caused its revenue and adjusted EPS to plummet year over year over the past three quarters.

Data source: Qualcomm. YOY = year over year.

For the fourth quarter, Qualcomm expects its revenue to shrink another 22%-29% year over year and for its adjusted EPS to drop 36%-42%. In other words, it hasn't reached the trough of this cyclical downturn yet.

The midpoint of Qualcomm's fourth-quarter outlook implies its full-year revenue will slump 19% as its adjusted EPS falls 33%. Analysts expect its revenue and adjusted EPS to drop 18% and 34%, respectively.

The upcoming tailwinds and headwinds

The rest of fiscal 2023 looks bleak, but three tailwinds could boost its revenue and profits next year. First and foremost, the smartphone market could finally warm up again. IDC expects global smartphone shipments to dip 1.1% this year as inflation stays hot and consumer demand remains tepid, but rise 5.9% in 2024 as those headwinds finally dissipate.

Second, Meta Platforms is installing Qualcomm's IoT chips in its Quest VR headsets. Meta's sales of its aging Quest 2 headsets cooled off this year, but its upcoming launch of the Quest 3 in late 2023 could lift Qualcomm's IoT chip sales. The company also expects to sell more IoT chips to VR headset developers in China. Finally, Qualcomm's automotive chip sales could continue growing by double-digit percentage rates as automakers develop more electric, connected, and driverless vehicles.

Yet several headwinds could still hobble its recovery. Apple, which accounted for over 10% of its revenue in fiscal 2022, plans to replace Qualcomm's baseband modems with its own chips by late 2024 or early 2025.

As Qualcomm loses Apple's orders, its competitive challenges could become more apparent. MediaTek, which overtook Qualcomm as the world's largest mobile chipmaker over the past two years, has been expanding into the high-end market with its flagship Dimensity 9000-series system on chips (SoCs). Qualcomm's longtime customer Samsung, which also accounted for over 10% of its revenue in fiscal 2022, has already been installing MediaTek's Dimensity SoCs instead of Qualcomm's Snapdragon SoCs across a broader range of its Galaxy phones. Qualcomm also faces intense competition from Nvidia, Mobileye, and other entrenched chipmakers in the automotive market.

Is it the right time to buy Qualcomm?

But looking ahead, analysts expect Qualcomm's dominance of the premium smartphone market and the expansion of its IoT and automotive businesses to offset those potential weaknesses. For fiscal 2024, they project its revenue and adjusted EPS to rise 9% and 16%, respectively, as the smartphone market warms up again and the macro environment improves.

Based on those forecasts, Qualcomm looks cheap at 13 times forward earnings and still pays a decent forward dividend yield of 2.7%. That low valuation and high yield should limit its downside potential. However, I don't think Qualcomm can command a higher valuation until a few more green shoots actually appear. In other words, it's probably a safe stock to buy and hold at these levels, but investors need to be patient and temper their near-term expectations.