The semiconductor industry has been off to a scorching hot start so far in 2023. In particular, Nvidia and Advanced Micro Devices have helped fuel the chip industry thanks in large part to developments in artificial intelligence (AI).
However, there is another semiconductor company I believe is getting overlooked in the midst of Nvidia's pursuit of the $1 trillion market cap club. Qualcomm (QCOM 0.85%) recently reported earnings for its fiscal third quarter, which ended June 25. While the results may initially appear a bit muted, there is more to the story.
Let's dig into Qualcomm's business and break down what is going on.
Don't judge a book by its cover
At first glance, Qualcomm's latest financial report looks messy. For the quarter ended June 25, the company reported revenue of $8.5 billion, down 23% from the year-ago period. The bottom line was even worse as net income and earnings per share both dropped over 50% year over year.
Some investors might want to close the door and walk away, but it's important to keep in mind that there are often two sides to every story. During Qualcomm's second-quarter earnings call, the company signaled revenue guidance in the range of $8.1 to $8.9 billion for Q3. As seen above, Qualcomm's latest reported revenue fell right in the middle of its guidance. While it would have been nice to see the company report closer to the higher end of its guidance, it still managed to beat Wall Street expectations for the bottom line while only narrowly missing consensus revenue estimates.
Given that the financials above are a mixed bag, investors may be wondering if there are underlying problems in Qualcomm's business specifically or if the results are consistent with more macro headwinds for the semiconductor industry as a whole.
Image Source: Getty Images
Is the business in trouble?
The biggest laggards in Qualcomm's fiscal third quarter were handsets and Internet-of-Things (IoT) products, which declined 25% and 24%, respectively. Management attempted to curtail any further investor pessimism by stating that they believe handset units will be down in the high single-digit percentage range compared to calendar 2022. The reason for this decline is due to broader macro trends as well as a slower recovery in the China region.
While this is not encouraging, it also does not deserve an overreaction. The Federal Reserve is currently battling some complex challenges as it pertains to the macroeconomic environment, namely high inflation. These problems will not be solved overnight, and investors should exercise some patience as both consumer and corporate spending normalizes.
On the brighter side, Qualcomm appears to have some catalysts on the IoT front. The company recently announced a collaboration with Meta whereby the social media giant's newly announced virtual reality headset will be powered by Qualcomm's technology. Moreover, Qualcomm is also helping Meta with its large language model (LLM) pursuits.
Given how seriously Big Tech is investing in generative AI applications, Meta's work with Qualcomm should not be discounted. While it is difficult to predict or forecast the impact of this partnership, at the very least, it looks to be an early nod of approval of Qualcomm's AI capabilities, which is encouraging.
Is the stock a buy?
When it comes to valuation, there are a couple of different multiples I like to analyze. Qualcomm currently trades at a forward price-to-earnings (P/E) ratio of 12.6 and a price-to-sales (P/S) ratio of 3.5. By comparison, let's take a look at these same multiples among some peers:
| Company | Forward P/E Ratio | P/S Ratio |
|---|---|---|
| Nvidia | 60 | 44 |
| Advanced Micro Devices | 42 | 8.6 |
| Taiwan Semiconductor | 20 | 7.1 |
| Qorvo | 21 | 3.4 |
Data source: Yahoo! Finance
Investors can see that Qualcomm trades at a steep discount to its peers. And while its financial results aren't exactly a cause for celebration, the chart above shows just how much investors have punished the stock. So far in 2023, Qualcomm stock has returned approximately 10%, lagging the S&P 500 considerably and not even in the same universe of its competitors.
While Nvidia and Advanced Micro Devices appear to be industry leaders, my view is that the semiconductor landscape will not be dominated by only two companies in the long term. Like its competition, Qualcomm has plenty of catalysts that should fuel the business going forward.
Although the company has a long road ahead, the stock seems oversold, and investors appear to be enamored by the likes of Nvidia and others. For this reason, now could be an interesting time to begin dollar-cost averaging into Qualcomm stock. If anything, it can help round out and serve as a hedge to any portfolio allocation you may have to other chip stocks or AI investments.
