Where Will Qualcomm Stock Be in 1 Year?

Qualcomm's (QCOM -0.26%) stock jumped 4% during after-hours trading on Nov. 1 after the chipmaker posted its latest earnings report. For the fourth quarter of fiscal 2023, which ended on Sept. 24, its revenue declined 24% year over year to $8.67 billion but exceeded analysts' expectations by $150 million. Its adjusted earnings fell 35% to $2.02 per share, but they also cleared the consensus forecast by $0.11.

Qualcomm's slowdown wasn't surprising, since it's still heavily exposed to the cyclical downturn in smartphone sales. But could this out-of-favor chip stock rally again over the next 12 months as the smartphone market stabilizes?

Image source: Getty Images.

Reviewing the key numbers

At first glance, Qualcomm's headline numbers look disastrous. Its revenue and adjusted earnings have both declined year over year by double digits for four consecutive quarters.

YOY = Year over year.

During Q4, Qualcomm generated 85% of its revenue from its QCT (chipmaking) segment and the remaining 15% from its QTL (licensing) segment.

Its QCT revenue fell 26% year over year. Its handset chip sales (74% of its QCT revenue) dropped 27% amid the market's soft demand for new smartphones. That weakness can mainly be attributed to the end of the 5G upgrade cycle, sluggish consumer demand, and stiff competition from MediaTek in the low-end to mid-range markets.

Its Internet of Things (IoT) chip sales (19% of its QCT revenue) also fell 31% as the macro headwinds curbed its chip sales to industrial customers. Its automotive chip sales (7% of its QCT revenue) grew 15% as automakers launched more connected vehicles, but that growth couldn't offset its weak sales of handset and IoT chips.

Brighter days are on the horizon

Yet on a sequential basis, Qualcomm's handset chip sales grew 4% sequentially, driven by the "early stages" of a recovery in Android devices, as its automotive chip sales grew 23%. That growth offset a 7% decline in its IoT revenue, and its total QCT revenue rose 3% sequentially. Its QTL revenue also grew 3% sequentially.

As a result, Qualcomm's total revenue increased 3% sequentially in Q4. That represented its first quarter of sequential growth since the first quarter of fiscal 2023.

For Q1 of fiscal 2024, Qualcomm expects to generate $9.1 billion to $9.9 billion in revenue. That would represent a 4% decline to 5% growth on a year-over-year basis, as well as 5% to 14% growth on a sequential basis. That guidance strongly implies the smartphone market has bottomed out.

During the conference call, CFO Akash Palkhiwala attributed that rosy forecast to the "normalization" of Android device inventories, "higher demand" for new flagship smartphones using its newest Snapdragon 8 Gen 3 mobile platform, and its expectation for "greater than 35%" sequential sales growth from its Chinese original equipment manufacturers (OEMs). It expects the recovery of its core handset market, along with its robust sales of automotive chips, to offset the macro pressures for its IoT business.

Qualcomm expects to generate an adjusted earnings per share (EPS) of $2.25 to $2.45 in Q1, which would represent a 5% decline to 3% growth from a year earlier. That range surpassed analysts' expectations for a 6% decline.

Where will Qualcomm's stock be in a year?

For the full year, analysts expect Qualcomm's revenue and adjusted EPS to grow 5% and 10%, respectively, as the smartphone market stabilizes. Based on those expectations, Qualcomm's stock still looks dirt cheap at 12 times forward earnings.

For reference, Nvidia and Intel trade at 25 and 21 times forward earnings, respectively. Texas Instruments, which faces the same headwinds as Qualcomm in the industrial market, trades at 21 times forward earnings.

Qualcomm generated $9.8 billion in free cash flow (FCF) in fiscal 2023, and it spent nearly $3 billion of that total on buybacks and $3.5 billion on dividends. It currently pays a forward dividend yield of 2.9%. Those shareholder-friendly strategies -- along with its $11 billion in cash, cash equivalents, and marketable securities at the end of the year -- will likely limit its downside potential and make it an attractive safe haven investment.

Qualcomm still faces some longer-term concerns regarding MediaTek's development of higher-end chips and its eventual loss of Apple's baseband modem orders in 2026. Nevertheless, I believe its continued dominance of the premium Android market, the expansion of its automotive business, its shareholder-friendly strategies, and its low valuations should all bring back the bulls. Therefore, I believe Qualcomm's stock will still outperform many of its industry peers and the broader market over the next 12 months.