When it comes to smartphone chipsets, Qualcomm (QCOM 1.45%) was and is the market leader. The company built a collection of patents that has kept it ahead of its competition for decades. Despite efforts from Apple, Intel, and other chip developers, manufacturers must turn to Qualcomm for the latest technology.
However, Qualcomm's rapid growth has given way to declines amid an uncertain economy. With the company's move to expand into the Internet of Things (IoT) and automotive segments and likely changes to the smartphone ecosystem, one may question where the semiconductor stock will stand with investors five years from now.
Looking to the future
Smartphones have become essential in both the developed and developing worlds. As long as Qualcomm can maintain its market lead over MediaTek and other chipset makers, it should resume growth as the economy recovers.
Moreover, Qualcomm's approach to the future should give investors comfort. One might remember how Microsoft failed to prepare for the consumer shift from PCs to smartphones.
Qualcomm intends to avoid that fate and has tried to anticipate how functionality may move away from smartphones. To that end, it developed products related to IoT and automotive to maintain its communication chip business over time.
Nonetheless, despite Qualcomm's edge in communications chips, it still faces competition from numerous companies that produce IoT and automotive chips. And its ability to compete effectively, much less dominate, is uncertain at best.
Qualcomm by the numbers
Indeed, if looking at Qualcomm using fiscal 2023 (ended Sept. 24) as a guideline, one might have low expectations for the company. Revenue of $36 billion fell 19% from year-ago levels. However, revenue grew 32% in fiscal 2022 and 64% in the prior fiscal year. That indicates the rapid growth could return once the economy improves.
Net income fell 44% in fiscal 2023 to $7.2 billion. Still, profits grew 43% in fiscal 2022 and 73% in fiscal 2021. Such moves indicate profits will rise and fall with revenue.
The company has declined to make forward projections beyond the fiscal first quarter. Still, the $9.1 billion to $9.9 billion forecast would amount to flat growth at the midpoint. Hence, meaningful revenue increases may return soon.
Also, Grand View Research forecasts a compound annual growth rate of 20% through 2030 in the smartphone chipset market. The handset segment, which develops smartphone chipsets, made up 63% of Qualcomm's revenue in fiscal 2023. This serves as another indication that growth could accelerate.
Finally, the P/E ratio is now around 20, a level below historical averages over the last five years. If net income increases accelerate and the earnings multiple expands, it could bode well for Qualcomm's future.
Qualcomm in five years
Ultimately, the company stands a strong chance of beating historical averages over the next five years. Admittedly, no entity can guarantee such a result, and factors such as industry slumps, the moves into more competitive parts of the chip business, and other unknown factors could derail Qualcomm stock.
However, the majority of revenue comes from its handset segment, the area where Qualcomm is the leader. This factor is unlikely to change soon, so that advantage alone should help Qualcomm.
Moreover, Qualcomm tends to experience rapid revenue and profit increases when times are good. If it can return to such growth rates as conditions improve, these benefits should also accrue to Qualcomm shareholders.
