With Expectations Low For Q4, Will Qualcomm Spring A Surprise?

Mobile chipset major Qualcomm (NASDAQ: QCOM) is expected to publish its Q4 FY’23 results on November 1, reporting on a quarter that is likely to see the company’s revenue contract meaningfully year-over-year, on account of a slowdown in smartphone and tablet sales. We expect revenue for the quarter to come in at about $8.04 billion, marking a decline of about 29% versus last year, and roughly in line with the consensus estimates. We project that earnings will come in at about $1.81 per share, slightly ahead of consensus estimates. See our analysis of Qualcomm Earnings Preview for a closer look at what to expect when the company reports earnings.

Amid the current financial backdrop and a lackluster smartphone market, QCOM stock has faced a notable decline of 25% from levels of $150 in early January 2021 to around $110 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. Notably, QCOM stock has underperformed the broader market in each of the last three years. Returns for the stock were 20% in 2021, -40% in 2022, and -1% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 10% in 2023 (YTD) – indicating that QCOM underperformed the S&P in 2021, 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could QCOM face a similar situation as it did in 2021, 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

The smartphone market has been cooling off of late as the tailwinds seen through the Covid-19 pandemic ease and also as economic uncertainty weighs on consumer spending. This is impacting Qualcomm’s CDMA Technologies (QCT) segment, which supplies application processors, modems, and software for technologies for mobile devices, networking equipment, and consumer electronics. Over Q3 FY’23, chip sales to the handset space declined by about 24% to $5.25 billion. Qualcomm is also likely to see its technology licensing business cool off, with the company guiding sales of between  $1.15 billion to $1.35 billion, down from $1.44 billion in the year-ago quarter.  That said, there could be a couple of bright spots for the company. For example, the automotive business should continue to gain some traction as semiconductors play a much bigger role in the transportation industry as trends such as electrification and autonomous driving gather pace. Over Q3, Qualcomm’s chip sales to the automotive space rose 13% year-over-year to $434 million.

We remain positive on Qualcomm stock despite the current headwinds, with a $133 price estimate which is about 22% ahead of the current market price. See our analysis of Qualcomm Valuation: Expensive Or Cheap? for more details on what’s driving our price estimate for Qualcomm. Qualcomm trades at just about 14x consensus 2023 earnings, which is a reasonable valuation. While this is partly due to the fact that revenues and earnings are projected to decline this year, the markets project that sales will recover in FY’24. Moreover, last quarter,  Qualcomm announced it had extended an agreement with Apple to supply modem chips to the iPhone maker until 2026. The development is very positive for QCOM, given that Apple was expected to use an internally developed 5G modem chipset starting in 2024.

[1] Month-to-date and year-to-date as of 10/24/2023
[2] Cumulative total returns since the end of 2016