Qualcomm: Not Your Simple Mobile Chip Stock (NASDAQ:QCOM)

A man hides an ace up his sleeve

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Investment thesis

So far, it is evident that a new critical semiconductor segment is materializing due to global electrification in the next few years and record high oil/gas prices from the Ukraine war. with If more automakers are converting their ICE production lines to electric vehicles, it’s no surprise that more semis are entering new automotive segments with varying levels of success. The IoT end market is also a force to be reckoned with due to the progressive digital transformation following the COVID-19 pandemic.

Qualcomm (NASDAQ: QCOM) is clearly the better of the lot, given its massive plan to acquire automotive design through connectivity, digital cockpit and advanced driver assistance system worth over USD 30 billion by FQ4’22. The figure shows a remarkable growth of 57.89% and USD 11 billion QoQ, otherwise a whopping 300% and USD 20 billion year-on-year, despite the worst recession fears. That figure is obviously impressive, as competitors like Nvidia ( NVDA ) reported just $11 billion in automotive revenue, while ON Semiconductor ( NASDAQ:ON ) boasts a total of $14.1 billion in long-term supply contracts for industrial and automotive applications.

As a result, QCOM has been widely misunderstood as a simple “mobile chip maker”, which has affected its stock relative to its more popular peers. Additionally, the stock market has so far been overly obsessed with data centers and PC/gaming chips, highlighting recent declines in Advanced Micro Devices ( NASDAQ:AMD ) , NVDA , and Intel ( INTC ) after destroying PCs in demand. Meanwhile, ON remains under-covered, despite strong prospects for its silicon carbide technology in electric vehicles (notably also used by Tesla ( TSLA ) as part of its internal chip program), renewable energy and IoT sectors over the next decade.

Within a decade, we expect this electrification tsunami to fuel the next super-cycle of growth in semiconductor stocks. The global electric vehicle market will further expand to $1.1 trillion at an accelerated CAGR of 22.5% compared to previous projections of 18.2%. The IEA also expected the number of electric vehicles on the road to grow to 350 million worldwide by 2030, at an aggressive CAGR of 40.41%. Furthermore, the global IoT market is expected to expand aggressively from USD 478.6 billion in 2022 to USD 2.46 thousand by 2029 at a CAGR of 26.4%. This provides QCOM with much-needed diversification to grow against the conventional data center and PC/gaming end markets.

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QCOM Brilliantly Blooms Above Simple “Mobile Chipmaker”

QCOM Estimated Revenue, Net Profit ($Billions) %, EBIT %, EPS and FCF %

QCOM Estimated Revenue, Net Profit ($Billions) %, EBIT %, EPS and FCF %

S&P Capital IQ

QCOM’s fate was unfortunately sealed when management drastically cut its next-quarter revenue guidance to between $9.2 billion and $10 billion, compared to the consensus revenue estimate of $12.05 billion. This further weighed on its earnings per share to $2.25, compared to estimates of $3.43. No wonder the stock fell -7.66% after the earnings release, as market analysts have also disastrously cut its peak and bottom growth of -13.62% and -21.94% for FY 2023 since our previous article in October 2022 .

However, we believe this is only kitchen sink guidance, giving QCOM management ample opportunity to outperform due to strong demand in the automotive sector. The company has beaten estimates for the past seven consecutive quarters, indicating its caution in light of NVDA’s overly optimistic guidance for FQ2’23 (triggering a massive semi-market depression following a downbeat announcement two months later).

Further, assuming that the reopening rumors in China are true, we may see smartphone sales continue to increase until H1’23, although there are new conflicting reports as well. Unfortunately, things are likely to remain uncertain in the short term, with the government responsible for 63.59% of the company’s revenue in FY22.

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QCOM EBT Margin Increase

QCOM EBT Margin Increase

S&P Capital IQ

In the meantime, QCOM investors need not worry as management continues to expand its EBT margins in an exemplary manner, particularly for the QCT segment, which encompasses handsets, 5G products, and the automotive and IoT end markets. Despite management’s commentary on the slowdown in mobile phone demand and chip glut, we expect these to be temporary as inventory levels naturally adjust as the cyclical nature of the market. The automotive and IoT end segments will prove to be the backbone of the company due to these pessimistic sentiments, proving the bears wrong.

The 5G market alone is already on the cusp of QCOM’s expanding partnership with Verizon ( VZ ) on the Qualcomm® 5G fixed wireless access platform. Although the latter is losing critical subscriber market share to competitors such as AT&T ( T ) and T-Mobile ( TMUS ), overall market demand for high-speed Internet is clearly increasing. These three telcos reported 1.29 million new wireless customers last quarter, despite rising inflationary pressures. According to the latest October CPI report, consumers continue to spend an increased sequential amount of 0.5% on broadband solutions.

In the meantime, we encourage you to read our previous article to help you better understand QCOM’s position and market opportunities:

  • Qualcomm: No qualms about adding here

So buying QCOM stock issell or hold?

QCOM 5Y EV/Revenue Valuations and P/E

QCOM 5Y EV/Revenue Valuations and P/E

S&P Capital IQ

QCOM remains extremely undervalued, notably trading at a much lower NTM P/E valuation of 12.14x and ON at 15.99x, compared to NVDA’s 41.81x at the same time. These recessionary fears have definitely created a once-in-fifteen-year opportunity for investors with a higher risk tolerance and a longer-term perspective, especially after the tragic corrections so far. These two companies represent unique and outstanding opportunities for those looking to branch out into automotive/industrial chip stocks beyond conventional automotive/EV stocks such as Tesla, General Motors ( GM ), Ford ( F ), and NIO ( NIO ) .

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QCOM YTD share price

QCOM YTD share price

The Search for Alpha

With QCOM shares tragically down -33.70% year-to-date, we may see more volatility in the short term depending on the November CPI report. Due to the slowdown in the inflation rate from the October CPI report, more expect a U-turn from the Fed soon. The S&P 500 has already recovered 10.16% since bottoming out in late September, with 75.8% of market analysts predicting a 50 basis point gain. Therefore, we think the stock remains attractive at current levels, given the consensus price target of $147.44 and a 25.62% upside potential.

Meanwhile, QCOM also reported improving supply chain channels due to continued demand destruction in the lower-margin PC/gaming and mid-range smartphone segments. The tragic inventory correction in these industries has also fueled an opportunistic opportunity for the company to expand its range of high-end processors in iPhone, Samsung and Chinese smartphones. By doing so, it improves its ASP and future growth. It’s actually not that bad since there’s no destruction of demand in the automotive and industrial markets.

Of course, investors who choose to add one or the other at current levels have to settle for more volatility in the short term, as it’s not certain whether the Fed will actually turn that early. In addition, we expect terminal prices to rise further above 6% compared to the previous projection of 4.6%.

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