In the weeks leading up to Qualcomm's (QCOM 0.85%) latest earnings report, the stock had begun to tick up -- likely on AI hype as the company starts to design chips for on-smartphone and on-PC artificial intelligence (AI) inference. But that's a longer-term development. Right now, this story is all about the ugly smartphone market, something that many investors seem to have forgotten.

Qualcomm stock sank back to where it was a few weeks ago after confirming what it already said investors should have been expecting. But does that mean it's time to sell Qualcomm stock? Maybe not.

Revenue falls again, but Qualcomm is really quite profitable

For the fiscal 2023 third quarter (ended June 25), Qualcomm reported revenue, earnings per share (EPS), and adjusted EPS within the range of its own guidance laid out a few months ago. Revenue was down 23% year over year to $8.45 billion. EPS handily exceeded guidance at $1.60, down 51% from last year. Adjusted EPS was near the high end of guidance at $1.87, down 37% year over year.

The big takeaway here, though, is that even in a nasty market for smartphone sales, Qualcomm remains highly profitable. Through the first nine months of the 2023 fiscal year, free cash flow was $6.05 billion -- up slightly from the same time in 2022, and representing a healthy free-cash-flow profit margin of 22%.

The mobile chip company is also rebuilding its balance sheet health, helped by the previously planned sale of Veoneer's "Active Safety" auto business to Magna for cash proceeds of $1.5 billion (part of the orchestrated purchase of Veoneer last year, in which Qualcomm is keeping the auto software segment). Over the last reported nine months, Qualcomm boosted its cash and short-term investments from $6.4 billion to $8.6 billion as of the end of June. Total debt dialed in at $15.4 billion.

How will Qualcomm turn things around?

Qualcomm has been doing lots of work with Meta Platforms and Microsoft to bring AI out of the data center and directly to devices. It's exciting research and development, and this AI will start to show up on flagship smartphones, PCs, and laptops starting in calendar year 2024. 

However, AI isn't the driving force behind Qualcomm right now -- at least not yet. This is still by and large a smartphone chip company, albeit with a fast-growing automotive and Internet of Things segment. But at the moment, Qualcomm needs excess inventory of phones to get burned off. Progress still needs to be made, especially in China where economic growth was sluggish at best following the lifting of COVID-era restrictions. There was some good news on the balance sheet, though, as inventory was once again reduced by a few hundred million dollars, down to $6.6 billion compared to well over $6.8 billion three months ago.

In the meantime, at least burning through that inventory is helping equate to higher free cash flow. 

But growth isn't back yet at Qualcomm. The fiscal fourth-quarter guidance was flat with Q3, although management struck a cautious tone in saying there could finally be a seasonal uptick in the first quarter of fiscal 2024 (coinciding with the 2023 holiday shopping season).

Time to give up on Qualcomm?

As promising as it might be with new growth outlets via automotive and eventually AI, owning Qualcomm stock is going to require patience. A pronounced rebound isn't going to be reported until at least early in calendar year 2024. 

In the meantime, shares trade for a meager 13 times Wall Street analysts' expectations for next year's earnings. Qualcomm could be a great value stock in the semiconductor industry, but the future isn't clear. For now, I'm a content shareholder.