As most informed artificial intelligence (AI) stock investors know, not all of these investments are multibaggers. In fact, some have struggled to outperform the S&P 500 during specified time periods.
Such has been the case with prominent semiconductor stock Qualcomm (QCOM 0.91%). Despite the company leading the way in smartphone chipsets and pivoting into AI, investors have not warmed to this stock amid a slower upgrade cycle and competitive concerns.
However, it may now have the catalyst to finally take this stock to new highs and beyond. Here's why.
NASDAQ: QCOM
Key Data Points
Why Qualcomm now?
Admittedly, now may not seem like an opportune time to take an interest in Qualcomm as it faces its most serious competitive threats in decades. The company admitted that Chinese tech giant Huawei no longer needed chips from Qualcomm. Additionally, Apple rolled out a plan to replace the company's chips in the iPhone by 2027, potentially costing it another major customer.
Qualcomm often prospered due to upgrade cycles, but with this latest cycle, Qualcomm has struggled. After the 5G upgrade cycle ran its course, Qualcomm's revenue growth turned negative. To reverse this trend, the company pivoted into AI on the hope that it would spark the next upgrade cycle. While Qualcomm is again growing revenue, it has yet to match the faster growth that once came from the upgrade to 5G.
Nonetheless, that could change with AI usage set to skyrocket thanks to the DeepSeek breakthrough. More consumers may now want to upgrade to capitalize on the AI functionality. Since the handset segment remains Qualcomm's largest revenue source, that should bode well for the company.
Moreover, Qualcomm is not just bringing AI to the smartphone business. The company has long envisioned a world where consumers might use smartphones less. To that end, Qualcomm pivoted into the Internet of Things and automotive applications to bring communications technology into other environments.
More recently, it has also developed chips to power PCs. This move puts the company in direct competition with Apple and AMD and could become an opportunity to gain ground on struggling chip giant Intel. Such technologies place Qualcomm at the forefront of AI and are likely to make its role in this industry even more prominent.
Where Qualcomm stands financially
Moreover, Qualcomm's financials had already begun to benefit from AI, and the most recent earnings release appears to confirm that.
In the first quarter of fiscal 2025 (ended Dec. 29, 2024), revenue of $11.7 billion grew 17% compared to the same quarter in fiscal 2024. This was faster than the 9% increase in fiscal 2024 and the 19% pullback in fiscal 2023.
Not surprisingly, the higher revenue has also made Qualcomm more profitable. Q1 net income to $3.2 billion rose 15% from year-ago levels. A tripling of income tax expenses slowed profit growth modestly, but that slowdown should not reflect on the company's successes.
Also, the outlook likely should not discourage investors. Indeed, the estimated Q2 revenue of $10.3 billion to $11.2 billion would represent a sequential slowdown to 14% at the midpoint. Still, in the previous quarter, the company forecast up to $11.3 billion in revenue for Q1, a prediction it handily beat. If that trend continues, revenue growth will accelerate.
Additionally, the stock sells at a P/E ratio of about 18, the lowest earnings multiple of the major semiconductor companies. This means if it can benefit from the higher demand for AI functionality, a combination of growth and multiple expansion could take this stock significantly higher.
Consider Qualcomm stock
Thanks to its market positioning and DeepSeek's recent breakthrough, Qualcomm could emerge as a top AI stock.
Admittedly, losing Huawei was a significant setback, and Apple dropping Qualcomm as a supplier could signify the loss of a critical competitive advantage.
Nonetheless, Apple has failed to replace Qualcomm more than once, and it is unclear whether it will succeed this time. Also, with AI modeling becoming significantly cheaper, more consumers will have a good reason to upgrade their smartphones.
Furthermore, higher demand for AI could lead to increased interest in Qualcomm's other products. At a P/E ratio of 18, the promise of its technology, along with a low valuation, could position Qualcomm stock for considerable returns.
