The semiconductor sector has been ablaze in 2023, with giants like Nvidia and Advanced Micro Devices (AMD) stealing the spotlight with their strides in artificial intelligence (AI) development. However, lurking beneath the chip stock surface is another player that might be overlooked in the shadows of Nvidia’s trillion-dollar market cap pursuit. Qualcomm (NASDAQ: QCOM) insights might surprise investors who are quick to judge based solely on the numbers.
Diving into the numbers
At first glance, Qualcomm’s Q3 financials might appear discouraging, with a 23% drop in revenue to $8.5 billion compared to the same period last year. The bottom line was even bleaker, as net income and earnings per share plummeted by over 50% year-over-year. These figures might have some investors considering an exit strategy, but as the adage goes, don’t judge a book by its cover.
Guidance and expectations
Delving deeper into Qualcomm’s Q3 results, it becomes apparent that there’s more to the story than meets the eye. During its second-quarter earnings call, the company provided revenue guidance ranging from $8.1 billion to $8.9 billion for the third quarter. As fate would have it, the reported revenue landed right in the middle of that guidance range. While it would have been preferable to see results closer to the upper end of the projection, it’s worth noting that Qualcomm managed to exceed Wall Street’s expectations for its bottom-line performance. It narrowly missed consensus revenue estimates, but given the complex macroeconomic landscape affecting the semiconductor industry, this performance seems more resilient than dismal.
Macro headwinds and individual performance
Scrutinizing Qualcomm’s performance in more detail, it’s clear that its underperformance was primarily attributed to its handset and Internet-of-Things (IoT) segments, which declined by 25% and 24%, respectively. Management attributed this dip to broader macroeconomic trends and a slower recovery in the Chinese market. While these figures aren’t uplifting, they shouldn’t spark an overreaction. The Federal Reserve is grappling with complex challenges, including high inflation, which won’t be resolved overnight. Qualcomm’s fortunes could rebound as these issues are addressed and consumer and corporate spending normalize.
Bright spots on the horizon
Qualcomm holds potential catalysts amid the challenges, especially in the IoT realm. The company recently announced a collaboration with Meta, where Qualcomm’s technology will power the social media giant’s new virtual reality headset. Additionally, Qualcomm is contributing to Meta’s large language model (LLM) initiatives. Given the current emphasis of major tech players on generative AI applications, this partnership with Meta underscores Qualcomm’s AI capabilities and potential contributions to cutting-edge technologies.
Valuation and potential
Assessing Qualcomm’s valuation, it becomes evident that the company is trading at a substantial discount compared to its peers. With a forward price-to-earnings (P/E) ratio of 12.6 and a price-to-sales (P/S) ratio of 3.5, Qualcomm stands in stark contrast to industry leaders like Nvidia and AMD, which have P/E ratios of 60 and 42, and P/S ratios of 44 and 8.6, respectively. Furthermore, Taiwan Semiconductor and Qorvo, both noteworthy competitors, boast higher multiples in comparison. This valuation gap underscores Qualcomm’s potential for growth and value appreciation.
A Unique opportunity
While Nvidia and AMD have garnered considerable attention as industry frontrunners, believing that just two companies will monopolize the semiconductor landscape in the long run, is shortsighted. Qualcomm possesses its own set of catalysts that could drive its growth trajectory. Although challenges lie ahead, the stock appears to be oversold, seemingly eclipsed by Nvidia and its peers. This situation, however, presents a promising opportunity. Now might be a compelling time for investors to consider a dollar-cost averaging strategy with Qualcomm stock. This approach could diversify a portfolio and offer a hedge against other chip stocks or AI investments.
Qualcomm’s potential shouldn’t be underestimated in an era where technological advancements are the norm. Its recent financials might raise questions, but a closer analysis reveals a more complex and encouraging narrative. The company’s collaborations in the AI and IoT sectors and its undervalued stock paint a picture of resilience and potential growth. Qualcomm might just be the sleeper hit that investors have been overlooking as the semiconductor industry continues to evolve.
