Not all semiconductor companies are enjoying the same momentum as Nvidia. Chip manufacturer Qualcomm (QCOM 0.85%) recently announced that it is laying off roughly 1,200 employees as part of an ongoing expense reduction program. With Qualcomm trimming its expenses while its cohorts invest in leading-edge artificial intelligence (AI) applications, some investors may wonder if it's time to move on.
Let's dig into why Qualcomm is trimming its expenses and how those cost savings may help the company return to accelerating top-line growth in the long run.
What's going on?
Qualcomm's revenue is declining and losses are mounting. Furthermore, unlike some of its cohorts, the company's forward guidance is not exactly giving investors a reason to cheer.
Through the third quarter of the company's fiscal 2023, ended June 25, Qualcomm reported total revenue of $27.2 billion, down 17% year over year. Moreover, net income was down 44%. The one bright spot is that Qualcomm's operating expenses of $20.8 billion were relatively flat when compared to the first nine months of last year.
The concern investors likely have when they see a financial profile like this is how a company can grow when it is not reinvesting into the business. In other words, Qualcomm's shrinking profits can be directly traced back to its falling top line. But if the company is not increasing spend in research and development, how can it feasibly grow its revenue in the long term?
Image source: Getty Images.
Investors should have expected this
Qualcomm addressed some of these concerns during the company's Q3 earnings call. Management highlighted that for much of fiscal 2023 the company has been laser focused on reducing spend in certain areas of the business. Moreover, given the company's mundane revenue guidance, management reiterated that it would entertain further cost reductions during the first half of fiscal 2024.
"We're going to reduce in certain areas, but then also have the capability to invest in new technology, especially AI, and continue to invest in our diversification plan," CFO Akash Palkhiwala said. "So it's really an effort to get our investment portfolio right as consistent with the priorities going forward for the company."
This is actually some positive news. Qualcomm seems to be well aware that it is losing market share to Nvidia and Advanced Micro Devices in particular. Both of those giants are leading the charge in generative AI and are showing no signs of slowing down. For this reason, Qualcomm is doubling down on cost savings efforts and plans to reallocate this capital into growth areas such as artificial intelligence (AI). While this presents the picture of Qualcomm playing a game of catch-up, I think it's the right strategic move.
Should you invest in Qualcomm stock?
QCOM Price to Free Cash Flow data by YCharts
The chart above shows the price-to-free-cash-flow ratio for Qualcomm benchmarked against Nvidia, AMD, and Taiwan Semiconductor. It's easy to see that Qualcomm trades at a significant discount compared to its peers based on this measure. With that said, some investors may argue that the premium in Nvidia and AMD are warranted at the moment. Nonetheless, the disparity among Qualcomm stock and its competition is striking.
To me, Qualcomm may not be on the same growth ship as others in the semiconductor industry, but the company itself is still operating from a decent position overall. It's still consistently profitable despite lagging revenue. Moreover, management has outlined a clear path to pursue artificial intelligence (AI) given the cost reduction campaign.
I view the depressed pricing action as an opportunity to dollar-cost average into a long-term position. Qualcomm still has plenty of catalysts in the pipeline, especially as it relates to strategic partnerships with Meta Platforms and Apple. The turnaround for Qualcomm could be closer than investors realize and at its current valuation, the stock looks like a bargain.
