Qualcomm (QCOM 0.32%), one of the largest mobile chipmakers in the world, saw its stock close at a record-high price of $181.67 on Dec. 15, 2021. The price had more than doubled over the previous two years as new 5G smartphones hit the market. It also expanded beyond smartphones with new automotive and Internet of Things (IoT) chips.
But today, Qualcomm's stock trades at about $113 a share. A $3,000 investment in the chipmaker at its all-time high would be worth less than $1,900 today. Let's see why the bulls retreated from Qualcomm -- and if it might bounce back in the near future.
Image source: Getty Images.
Why did Qualcomm's stock collapse?
Qualcomm's revenue rose 55% in fiscal 2021 (which ended in September 2021) and 32% in fiscal 2022. However, analysts expect its revenue to decline 25% in fiscal 2023.
Qualcomm's growth cooled off as the 5G upgrade cycle ended. The macro headwinds exacerbated that slowdown by curbing the market's appetite for new smartphones, while MediaTek -- which overtook Qualcomm as the world's top producer of mobile system-on-chips (SoCs) in late 2020 -- remained a tough competitor in the lower-end market.
Qualcomm generates most of its revenue from its Snapdragon SoCs, but its smaller licensing business -- which leverages its massive portfolio of wireless patents to take a cut of each smartphone sold worldwide (even if they don't use Qualcomm's chips) -- generates revenue at much higher margins than its chip-making business. But as the following table illustrates, the year-over-year growth of both its chipmaking (QCT) and licensing (QTL) segments decelerated over the past year.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
QCT Revenue Growth (YOY) |
45% |
28% |
(11%) |
(17%) |
(24%) |
|
QTL Revenue Growth (YOY) |
2% |
(8%) |
(16%) |
(18%) |
(29%) |
|
Total Revenue Growth (YOY) |
37% |
22% |
(12%) |
(17%) |
(23%) |
Data source: Qualcomm. YOY = Year over year.
Qualcomm expects its revenue to decline another 22% to 29% year over year in the fourth quarter -- which strongly suggests it hasn't reached the trough of its cyclical downturn yet. To make matters worse, Qualcomm's top customer, Apple, -- which regularly buys its baseband modems and accounted for over 10% of its revenue in fiscal 2022 -- plans to start producing its own baseband modems by 2026.
To reduce its dependence on Apple and the broader smartphone market, Qualcomm has been rolling out new IoT and automotive chips. But in its latest quarter, those two smaller divisions only accounted for 27% of its chipmaking revenue. It also faces stiff competition from other chipmakers like Mobileye, Ambarella, and Nvidia in the automotive chip market.
NASDAQ: QCOM
Key Data Points
Is Qualcomm's stock ready to rebound?
At its all-time high, Qualcomm still seemed reasonably valued at 14 times the adjusted EPS it went on to generate in fiscal 2022. However, analysts expect its adjusted EPS to drop 38% in fiscal 2023 as its smartphone SoC business stalls out.
At $113, Qualcomm stock still seems cheap at 15 times that forecast -- but value-seeking investors probably won't bite until its profits start rising again. Yet longer-term investors should realize that recovery might be just around the corner.
According to IDC, global smartphone shipments will likely decline 1.1% in calendar 2023 as the soft macro environment curbs the market's appetite for new devices, but rise 5.9% in 2024 as those headwinds finally dissipate.
Until that happens, Qualcomm plans to rein in its spending on smartphone chips, invest in the growth of its automotive and IoT businesses, and keep plowing its cash into big buybacks and dividend hikes. Qualcomm has already bought back over a third of its shares over the past decade, and it's raised its dividend annually for over two decades. Its forward yield of 2.9% should limit its downside potential, and its insiders actually bought more shares than they sold over the past 12 months.
However, I don't expect the bulls to rush back to Qualcomm until its chipmaking and licensing businesses stabilize. In other words, Qualcomm isn't in serious trouble -- but it could be a very long time before it revisits and surpasses its all-time high.
