Will Qualcomm Stock Return To Pre-Inflation Shock Highs Of Over $180?

Qualcomm stock (NASDAQ:QCOM) currently trades at $108 per share, roughly 43% below its pre-inflation shock high of $189, seen in December 2021, and has the potential for meaningful gains. QCOM saw its stock trading at around $128 in late June 2022, just before the Fed started increasing interest rates, and is now 16% below that level, underperforming the broader markets, considering that the S&P 500 rose almost 12% over this period. The decline in Qualcomm stock over the recent past can be attributed to a considerable slowdown in the smartphone and tablet market, amid cooling consumer spending and weaker demand for computing and mobile devices post Covid-19. Over Q3 FY’23, the most recent quarter, Qualcomm reported a mixed set of results with revenue missing estimates, declining by 23% year-over-year to $8.44 billion, although profits came in ahead of estimates. There have been some positive developments for the stock as well, with Qualcomm announcing earlier this month it had extended an agreement with Apple to supply modem chips to the iPhone maker until 2026. Apple was expected to use an internally developed 5G modem starting in 2024 but is apparently facing some setbacks with its development.

Interestingly, QCOM stock has had a Sharpe Ratio of 0.4 since early 2017, slightly lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Returning to the pre-inflation shock level means that Qualcomm stock will have to gain 76% from here. However, we do not believe that will materialize anytime soon and estimate Qualcomm valuation to be around $133 per share, implying about 22% gains. This is because of an expected decline in earnings and revenue in the near term due to a weak smartphone market and lower modem demand. Moreover, the recent uncertainty in the financial sector has raised concerns about a potential recession, which may impact Qualcomm’s business.

Our detailed analysis of Qualcomm upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how QCOM stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Qualcomm and S&P 500 Performance During 2007-08 Crisis

Qualcomm stock declined from $44 in September 2007 (pre-crisis peak) to around $33 in March 2009 (as the markets bottomed out), implying the stock lost over 20% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $46 in early 2010, rising nearly 38% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Qualcomm Fundamentals Over Recent Years

Qualcomm’s revenue rose from $24 billion in FY’19 to $44 billion in FY’22, driven by surging chipset sales through the Covid-19 pandemic. However, of late, its chipset segment sales have been weighed down by cooling demand for digital devices following the easing of the pandemic and the remote working trend. For the last 12 months, revenue stood at $39 billion.  Qualcomm’s operating margin slid from 20.5% in 2019 to 18.7% in 2022. Its EPS rose from $3.60 in 2020 to about $11.50 per share in 2022, although it declined to about $9.40 over the last 12 months.

Does Qualcomm Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

QCOM’s total debt has remained roughly flat at about $16 billion over the last four years. The company garnered $9 billion in cash flows from operations in 2022. Given its cash position of close to $9 billion as of the last quarter, Qualcomm appears to be in a comfortable position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Qualcomm (QCOM) stock has the potential for some gains once fears of a potential recession are allayed. That said, the expected decline in near-term earnings, partly due to the higher inflation and foreign currency translation, remains a risk factor to realizing these gains.

[1] Month-to-date and year-to-date as of 9/27/2023
[2] Cumulative total returns since the end of 2016

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