Where Will Qualcomm Stock Be In 1 Year?

Shares of Qualcomm (NASDAQ:QCOM) fell 6% on May 4 after the mobile chip maker released its latest earnings report. Revenue fell 17% year-over-year to $9.27 billion for the second quarter of fiscal 2023, which ended March 26, but beat analyst expectations by $148 million. However, adjusted earnings fell 33% to $2.15 per share, beating estimates of $0.01 per share.

Qualcomm's dismal numbers come as no surprise as the entire semiconductor industry is currently grappling with a cyclical downturn, but the stock's 20% decline over the last 12 months already reflects much of that pessimism. Can These Garbage Token Stocks Attract Investor Value and Recover Over the Next 12 Months?

Understand Qualcomm's business

Qualcomm is a global leader in system-on-chips (SoCs) that combine a processor, GPU and baseband modem in a single package for mobile devices. It also sells standalone modems to Apple , which accounts for more than 10% of the company's revenue in fiscal 2022, and other smartphone makers.

In the second quarter, Qualcomm got 86% of its revenue from the chipset division. The remaining 14% comes from the licensing segment, which leverages its broad patent portfolio for wireless devices to secure stakes in every smartphone sold worldwide.

Qualcomm is seeking to diversify away from the smartphone market which is saturated with new chipsets for cars and the Internet of Things (IoT). But phone chips still accounted for 77% of the chip industry's revenue in the second quarter, so its fate will be closely linked to the smartphone market going forward.

Qualcomm also relies heavily on its higher-margin licensing arm to offset lower margins in its chip business and drive revenue growth. But most of that revenue still comes from smartphones, not cars or IoT chips.

Tracks Qualcomm cycle contractions

Qualcomm has seen tremendous growth in 2020 and 2021 as phone makers transition from 4G to 5G devices. Apple's launch of the iPhone 12, the first of a family of 5G devices, at the end of 2020 gave Qualcomm a strong tailwind. However, the company lost momentum in 2022 as it entered this update cycle. Inflation hurdles, the war in Ukraine, and China's intermittent COVID-19-related lockdowns exacerbated this slowdown.

The headwind pushed global smartphone shipments down 11.3% to 1.21 billion units in 2022, according to IDC, the industry's lowest annual number of shipments since 2013. The research firm expects the slowdown to continue, with a further decline of 1.1% in year 2023. Why has Qualcomm's growth slowed to rapid growth over the past year?

size	Second quarter of 2022	Third quarter of 2022	Fourth quarter of 2022	First quarter of 2023	Second quarter of 2023
Revenue Growth (Y/Y)	41%	37%	22%	(12%)	(17%)
EPS Growth (y/y)	69%	54%	23%	(27%)	(33%)

Non-GAAP basis. YOY = year after year.

As the 2023 fiscal year begins, buyers are hoping that Qualcomm will finally hit rock bottom and recover. Unfortunately, the corporate crisis worsened in the first half of fiscal 2023, and it's expected that decline will worsen, as third quarter revenue is expected to fall 19% year-over-year to 26%. Analysts had expected a slight drop of 17%.

During a conference call, CEO Cristiano Amon warned that "the changing macroeconomic context has led to a further decline in demand, particularly for handsets, which is an order of magnitude larger than we previously anticipated." Amon also said that Qualcomm has yet to see a "meaningful recovery" in the China market post-COVID-19 and its chip inventories are expected to remain high "for the next few quarters at least."

In addition, Amon expects Apple to replace Qualcomm's modems with its own by 2024. Such a transition could have a major impact on the company's bottom line and hinder its cyclical recovery.

Focus on controllable factors

As Qualcomm prepares for a near-term downturn, it plans to cut costs, buy back more stock to increase earnings per share, and expand its portfolio of automotive and IoT chips to reduce reliance on smartphones.

But the margins are still under pressure. In the second quarter, the chip industry's pre-tax (EBT) margin fell to 27% from 35% year-on-year, while the EBT licensing margin fell to 68% from 73%.

In the third quarter you expect the EBT margin for the chip industry to be between 23% and 25% and the EBT margin for licenses to be between 64% and 68%. So their profitability is still falling -- and it's not clear when it's going to fall.

On the positive side, Qualcomm always returns a lot of money to its investors. The company bought back $903 million of stock and paid an $834 million dividend in the second quarter, increasing the quarterly dividend by 7%. It currently pays an expected dividend yield of 2.7%, and the stock looks pretty cheap at 13 times the earnings.

Where will Qualcomm be in a year?

Qualcomm's weakness is limited at this level, but I believe it will trade sideways and bounce back over the next 12 months. It still faces many near-term challenges and there are no clear signs yet that the bottom is in place. Investors should hold on to other promising technology stocks until Qualcomm's outlook improves.

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Liu Sun has held positions at Apple and Qualcomm. Motley Fool has and recommends positions at Apple and Qualcomm. Motley Fool has a disclosure policy.

What happened to Qualcomm stock? | Qcom stock analysis in dollars