With Smartphone Market Picking Up, Will Qualcomm Deliver A Q4 Beat?

Mobile chipset major Qualcomm (NASDAQ: QCOM) is poised to publish its Q4 FY’24 results in the coming weeks.  The stock has risen by a about 20% year-to-date, outperforming semiconductor peer Intel (NASDAQ:INTC), which has plummeted by about 50% over the same period. Now we expect Qualcomm’s earnings for the quarter to come in at $2.57 per share, up about 25% compared to last year, while revenues are likely to stand at $9.95 billion, slightly ahead of consensus estimates and about 14% higher compared to last year. There have been several factors driving the recent gains for the company, including a recovery in the smartphone market and optimism that the generative AI trend will help chipset sales. See our analysis of Qualcomm Earnings Preview for a closer look at the trends that are likely to drive Qualcomm’s results for the quarter.

While the smartphone market saw a lull in 2023, as the Covid-19 pandemic eased and economic uncertainty weighed on consumer spending, things have been looking up of late. Worldwide smartphone shipments are projected to grow almost 6% in 2024 to 1.23 billion units, per research firm International Data Corporation. This should benefit Qualcomm’s CDMA Technologies (QCT) segment, which sells application processors, modems, and software for mobile devices, networking equipment, and consumer electronics products.  Over the Q3 FY’24, QCT revenue stood at $8.1 billion, up 12% year-over-year and the company is guiding revenue of between $8.1 billion to $8.7 billion for Q4. Qualcomm has also been witnessing higher demand from China, as demand for premium Android devices grows at the expense of Apple’s iPhone. Over the last quarter, sales to China rose by 50% year-over-year. Qualcomm recently signed a long-term licensing agreement with Honor and this could also drive sales going forward.  The surging interest in generative artificial intelligence is also benefiting Qualcomm. The company is seeing higher demand for high-end chipsets such as the Snapdragon 8 Gen 3 that are optimized for AI, including enhancing voice assistants and generating images. We will be looking for updates on Qualcomm’s new Snapdragon X PC chips. A few months ago, Microsoft and other Windows PC players announced new computers with artificial intelligence features using these new processors. We will look for updates on the same when the company publishes earnings. While GPU major Nvidia has emerged as the face of the AI hardware revolution, this data center company has been growing its sales even faster than Nvidia and trades at a much cheaper valuation.

Qualcomm’s automotive business has been performing well as semiconductors play an increasingly critical role in the transportation industry, driven by trends like electrification and autonomous driving. In Q3, the company reported $811 million in automotive revenue, an 87% year-over-year increase. Semiconductor content in vehicles has also been rising. According to Deloitte, electronics now make up 40% of a new vehicle’s total cost, compared to under 20% in 2000, with this figure expected to exceed 45% by the end of the decade. Qualcomm is gaining market share and remains on track to exceed $4 billion in automotive revenue by FY’26. However, growth may face short-term challenges on account of a slowdown in car sales and a dip in the EV industry.

QCOM stock has fared reasonably well over the last few years led by the generative AI trend and a shift toward more premium handsets. However, returns over the last 4-year period have been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 22% in 2021, -39% in 2022, and 35% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, could QCOM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Qualcomm stock trades at just about $170 per share, or about 17x consensus FY’24 earnings, which is a reasonable multiple, considering the recovery in the smartphone market, and Qualcomm’s push into sectors including automotive and PCs chips. That said, there are some concerns as well. Competition in the company’s core mobile chipset space is also mounting. For instance, China’s Huawei’s new smartphones will feature its proprietary Kirin processors going forward, leading to lower sales for Qualcomm. There is also speculation that Samsung could drop Qualcomm processors on its upcoming flagships in favor of its own Exynos line of chips.  We have a $189 price estimate for Qualcomm, which is 11% ahead of the current market price of $170. See our analysis of Qualcomm Valuation: Expensive Or Cheap? for more details on what’s driving our price estimate for the stock.

While investors have their fingers crossed for a soft landing by the U.S. economy following the start of the Fed’s monetary easing cycle, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 10/13/2024
[2] Cumulative total returns since the end of 2016