The past three years have been disappointing for Qualcomm (QCOM +10.79%) investors: Shares of the semiconductor specialist have gained just 8% as compared to the 36% gains clocked by the PHLX Semiconductor Sector index over the same period. That's not surprising given the weakness in the smartphone market during this interval.
Sales of smartphones fell from 1.54 billion units in 2019 to 1.36 billion units the following year. The market didn't witness much growth through 2023 -- shipments came in at 1.34 billion units last year. Given that Qualcomm got 62% of its revenue in the previous quarter from selling smartphone chips, it is easy to see why the stock has underperformed the broader market in recent years.
NASDAQ: QCOM
Key Data Points
However, will the next three years bring about a turnaround in Qualcomm's fortunes, especially considering that the company has a new catalyst in the form of artificial intelligence (AI)? Let's find out.
Qualcomm's growth is back on track
The weakness in the smartphone market has weighed down Qualcomm's top-line growth in the past three years. This is evident from the chart below.
QCOM Revenue (TTM) data by YCharts.
However, Qualcomm's results for the third quarter of fiscal 2024 (which ended on June 23) suggest that its fortunes are turning around. The chipmaker's quarterly revenue increased 11% year over year to $9.4 billion, while its adjusted earnings jumped 25% from the prior-year period to $2.33 per share. Wall Street would have settled for $2.25 per share in earnings on revenue of $9.2 billion.
Even better, Qualcomm's guidance turned out to be more optimistic than analysts' expectations. The company is expecting $2.55 per share in earnings on revenue of $9.9 billion in the current quarter. That's better than consensus expectations of $2.45 per share on revenue of $9.69 billion.
Qualcomm's guidance indicates that its revenue is set to increase 14% year over year, which would be an improvement over its performance in the previous quarter. Meanwhile, bottom-line growth would come in at 26% as per the midpoint of Qualcomm's guidance. Still, investors pressed the panic button following Qualcomm's results after the company hinted that the recovery in the smartphone market won't be rapid.
CEO Cristiano Amon pointed out on the latest earnings conference call that the smartphone market could clock "kind of flattish to low single digits in growth." This seems to have caused some disappointment among investors; Qualcomm stock fell more than 5% after its earnings release. However, investors would do well to look at the bigger picture. The growth of the AI-enabled smartphone market should ideally allow the company to sustain its newly found growth momentum.
Though the overall growth of the smartphone market may not be very attractive, as Amon's comments indicate, he did point out that premium smartphones are growing at a faster pace. Additionally, the Qualcomm CEO remarked that the demand for AI-enabled smartphones is playing a central role in driving demand for premium devices.
That's not surprising, since shipments of generative-AI-enabled smartphones are expected to grow by 4x between 2024 and 2027, according to Counterpoint Research. Even then, the market for AI smartphones will have more room for growth. That's because generative-AI smartphones are expected to account for 43% of global smartphone shipments in 2027 as compared to 11% this year.
Given that the AI smartphone market is currently in its early phases of expansion, Qualcomm could be at the beginning of a terrific growth curve that could lead to healthy gains in the company's top and bottom lines over the next three years.
Healthier growth prospects could help the stock deliver solid gains
Qualcomm is likely to end the current fiscal year with revenue of $38.6 billion based on the revenue it has generated in the first nine months and the guidance it has issued for the current quarter. That would be a jump of 8% from the year-ago period. However, its fiscal 2025 revenue growth is likely to land in the double digits at just over 10%.
As Qualcomm's latest results and the guidance for the current quarter indicate, it could do better than that considering the acceleration that the company is forecasting in its growth and the healthy secular opportunity it is sitting on in the form of AI smartphones. The company is now clocking 20%-plus earnings growth, which is much faster than the 11% annual earnings growth that analysts are forecasting Qualcomm could deliver over the long run.
Assuming the company can clock even a 15% annual earnings growth rate over the next three years, its bottom line could increase to $15 per share (using its fiscal 2024 earnings estimate of $9.90 per share as the base). Multiplying that with Qualcomm's current price-to-earnings ratio of 23 means that it could trade at $345 per share after three years. That would be double Qualcomm's current stock price.
It is worth noting that Qualcomm stock is a value play if we consider that the Nasdaq-100 has an earnings multiple of almost 31. Investors, therefore, are getting a solid deal on this semiconductor stock, which could deliver healthy gains over the next three years, and they should consider grabbing this opportunity with both hands while the company remains undervalued.
