Shares of Qualcomm (QCOM +0.38%) have enjoyed healthy gains of over 20% year to date, despite dropping 20% from the 52-week high it hit on June 18.
However, there is a good chance this semiconductor stock could come out of this slump when it releases its fiscal 2024 third-quarter results on July 31. Let's see why that may be the case.
NASDAQ: QCOM
Key Data Points
Improving smartphone demand could help Qualcomm post better-than-expected results
Qualcomm released its fiscal 2024 second-quarter results (for the three months ended March 24) on May 1. The company's top line was flat on a year-over-year basis at $9.4 billion. Revenue from the handset business was also flat on a year-over-year basis at $6.2 billion. So, Qualcomm generates nearly two-thirds of its revenue from selling smartphone chips, which means its fortunes are tied to the health of this market.
The smartphone market wasn't in great shape last year as shipments declined 3% on account of poor demand, according to market research firm IDC. However, 2024 is turning out to be a better year. Smartphone sales increased 7.8% in Q1, followed by an increase of 6.5% in Q2.
IDC points out that smartphones equipped with generative artificial intelligence (AI) features are growing faster than expected, and their shipments are expected to hit 234 million units in 2024. Even then, AI smartphones will have a lot of room for growth as they are expected to account for 19% of the overall market this year.
The stronger-than-expected growth in AI smartphone adoption should ideally be a tailwind for Qualcomm as it controlled 23% of the smartphone processor market at the end of 2023. More importantly, Qualcomm management pointed out in the May earnings call that it was witnessing strong adoption of generative AI smartphones in China with premium devices from manufacturers such as Xiaomi, OnePlus, Vivo, and Huawei gaining momentum.
It is worth noting that Xiaomi and Vivo's shipments increased substantially last quarter. While Vivo's smartphone shipments jumped 22% year over year, Xiaomi reported 27% year-over-year growth. The strong jump in shipments recorded by these Chinese manufacturers bodes well for Qualcomm as it has been supplying its AI-focused smartphone chips to them.
The company guided for $9.2 billion in revenue for fiscal Q3 when it released its previous results. That would translate into year-over-year growth of 9%. Analysts expect Qualcomm to report $2.25 per share in earnings on revenue of $9.21 billion, which is in line with the company's guidance. However, the strong growth in AI smartphone shipments last quarter could help Qualcomm beat Wall Street's outlook.
More importantly, Qualcomm can sustain a stronger pace of growth in the long run thanks to the rapid adoption of AI smartphones.
The bigger picture appears to be bright
IDC previously forecasted shipments of 170 million AI smartphones this year. However, it has significantly upped its guidance, suggesting that consumers are warming up to this technology faster than expected.
Shipments of generative AI-enabled smartphones could jump from an estimated 234 million units in 2024 to 912 million units in 2028. That translates to an outstanding compound annual growth rate of 78% based on 2023's shipments of 51 million units.
Such growth in the AI smartphone market would support a better-than-expected outlook for Qualcomm in its results next week. As such, there is a good chance this semiconductor stock could resume its upward climb for 2024.
That's why now is a good time to buy shares of Qualcomm. The stock is trading at 26 times trailing earnings, a discount to the Nasdaq 100 index's multiple of 32 (as a proxy for tech stocks). It may not be available at such an attractive valuation for long.
