Why Did Qualcomm Stock Go Down?

Qualcomm (NASDAQ:QCOM) is the second-largest smartphone chipset maker, commanding a 23% global market share as of the first quarter of this year. Currently, the smartphone market is in recovery mode.

Global smartphone sales had a difficult couple of years due to component shortages, inventory buildups, and longer replacement cycles. However, after a stint of 27 straight months of decline, the smartphone market started rebounding late last year.

According to data from Counterpoint Research, global smartphone sell-through volumes grew by 6% year-over-year in the last quarter, recording the highest year-over-year increase in the last three years.

As the gloomy clouds gradually recede from the smartphone market, does Qualcomm have a chance to take advantage of the rebound?

Over the past five years, it has gained 155.5%, which compares well to the broader SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that has returned 88.1% over the same period. But the recent trend has been lower, so what does the future hold?

Why Did Qualcomm Stock Go Down?

Qualcomm stock went down recently following a JP Morgan analyst downgrade that led to the share price falling from highs of $227 per share.

Last year, Qualcomm faced an extremely tough operating environment as handset sales declined rapidly. For the fiscal year 2023, the company posted a revenue figure on a non-GAAP basis of $35.83 billion, reflecting a 19% decline from the prior year.

Handset sales have a large weighting in Qualcomm’s top line. Over the past year, they accounted for 74.3% of the Qualcomm’s CDMA Technologies (QCT) segment, the flagship division, and 63% of the total top line.

It’s no surprise that revenues took a hit when handset sales declined by 22% from the year-ago figure. Internet of Things, or IoT, sales also slid by 19% year-over-year.

The revenue decline resulted in a more-than-proportional pullback in the company’s bottom line. Non-GAAP net income and EPS both plunged by 33% from the prior year.

However, at the end of last year, the company was seeing a better operating climate than at the start. Management was expecting further stabilization in demand for global 3G, 4G, and 5G handsets. And to their credit, this is actually being realized this year.

In the first and second quarters of fiscal 2024, the company’s financials have slowly rebounded, with both top and bottom line gains compared to the prior year’s quarters.

In Q1 and Q2, non-GAAP revenue climbed by 5% and 1% year-over-year, respectively. The bottom line reflected the upbeat headline figures with EBIT coming in at $2.3 billion and $2.2 billion for the past two quarters.

Qualcomm Snapdragon Driving Growth

Qualcomm is renowned for its Snapdragon processors. The Snapdragon processors and mobile platforms are used to support advanced computing. The processors feature multi-core CPUs, and devices laden with them support immersive augmented and virtual reality experiences.

In this regard, the company has made meaningful partnerships. For example, it is related to the smartphone-making juggernaut Samsung. Bolstering this partnership, Qualcomm announced that its Snapdragon 8 Gen 3 Mobile Platform for Galaxy is powering the Samsung Galaxy Z Fold6 and Galaxy Z Flip6 globally.

Qualcomm is also trying to strengthen its position in the PC space. A new category of advanced PCs, the Copilot+, is only powered by Snapdragon X Elite and Snapdragon X Plus Platforms. The NPU in this Snapdragon series is regarded as a key differentiator. Delivering a better and different personal computing experience has the potential to be the key to future growth.

Speaking of which, management has other developments in the pipeline that may well be instrumental to driving upside. The next generation of PCs, smartphones, and other IoTs will likely be filled with applications of generative AI. Qualcomm has this in mind, which is why it launched the Qualcomm AI Hub, a gateway for developers to enable at-scale commercialization of on-device AI applications.

Snapdragon continues to see better performance in premium to high-tier smartphones. Tapping into the mid-scale smartphone subspace might yield better outcomes in the future, and there are good reasons to be optimistic about this.

What Does The Future Hold For Qualcomm?

The future is clearly artificially intelligence powered and, by facilitating that, Qualcomm has the potential to emerge as a chip manufacturing winner. Still, some hurdles remain in its path.

First, the smartphone market is still rebounding. Second, the company’s business faces inherent seasonality. Third, the markets Qualcomm operates in are teeming with big-name competitors.

On the other hand, chip demand is growing steadily, which makes room for quite a few companies to experience growth. Qualcomm has also been on a path of recovery, which is optimistic.

The stock’s price sits at 21.8x price-to-earnings and 19.3x forward non-GAAP earnings, which is quite reasonable compared to the industry average. 

In addition, 21 analysts have revised their estimates higher for the upcoming quarter and the dividend has increased for 21 years straight too, now sitting at 2.01% with a $3.40 per share annual payout and a reasonable payout ratio of just 41.6%.

The consensus among analysts is that the share price can rise to $217 per share while a 10-year discounted cash flow forecast is more cautious and places fair value at $186 per share.

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