Qualcomm: Wait For Another Bottom In September
Qualcomm is already showing signs of weakness post FQ3'22 earnings call. Check out at what price QCOM stock can be bought.
Qualcomm: Wait For Another Bottom In September
Summary
- Qualcomm is already showing signs of weakness post FQ3'22 earnings call, significantly worsened by the Fed's hawkish comments.
- We may potentially see another $120s over the next few weeks, which has proved to be QCOM's support level for the past two years.
- With aggressive plans to diversify into the server market, QCOM should easily deliver growth, with a promising $700B Total Addressable Market.
Investment Thesis
Qualcomm's (NASDAQ:QCOM) stellar performance in FQ3'22 was obviously overshadowed by the softer guidance for FQ4'22. However, we must highlight that QCOM is already performing by leaps and bounds better than expected, given the destruction of demand in the PC, mobile, and gaming industries. The company had side-stepped the massive headwinds experienced by Nvidia (NVDA) and Intel (INTC), due to the strength in the former's premium smartphone segment, significantly cushioned by its long-term partnership with Apple (AAPL) and Samsung Electronics (OTCPK:SSNNF). Therefore, we reckon that the reaction post FQ3'22 earnings call is probably overblown.
Nonetheless, due to the Fed's hawkish commentary on the rising inflation, we may expect to see a steep interest hike in its upcoming meeting on 20 September. Combined with the weakening consumer demand in the mid-tier Android segment due to the worsening macroeconomics, we may see a further stock weakness ahead, as witnessed since 25 August 2022.
Massive Growth In The Global Server Market
In any case, we believe that the dip would offer an attractive entry point for those looking to add QCOM. Furthermore, the company is rumored to re-enter the server market moving forward, through the Nuvia acquisition previously completed in March 2021. That strategic expansion would provide the management with a much-needed diversification beyond the existing smartphone, IoT, and automotive segments, since the server market represents yet another avenue of global digital transformation beyond its $700B addressable market by 2026. Tai Liani, the analyst at Bank of America, said:
The deflating handset demand is a risk, yet we believe it is already reflected in expectations, and remain confident in the company’s long-term revenue opportunities and diversification strategy beyond handsets. (Seeking Alpha)
QCOM Has Performed Well Thus Far - Despite The Destruction In The Semi Market
In FQ3'22, QCOM reported revenues of $10.94B and gross margins of 56%, representing an increase of 35.7% though a decline of 1.8 percentage points YoY, respectively. In contrast, the company grew its profitability impressively to net incomes of $3.73B and net income margins of 34.1%, indicating an increase of 83.7% and 9 percentage points YoY, respectively.
The growth in QCOM's sales mainly was attributed to the record growth in the QCT Automotive and IoT segments, which recorded impressive YoY increases of 38% and 31%, respectively. Naturally, this is on top of the revenue driver segment, namely the handsets, which accounted for 56% of its revenues with a remarkable YoY growth of 58% in FQ3'22.
In FQ3'22, QCOM reported total operating expenses of $2.71B, representing a minimal increase of 10.1% YoY. This has massively improved the ratio to its growing sales at 24.8% of its revenues and 44.2% of its gross profits for the latest quarter, compared to 30.5%/52.9% in FQ2'21 and 41.5%/72.2% in FQ2'20, respectively. Thereby, boosting QCOM's profitability at the moment.
In the meantime, QCOM reported a 9.4% YoY increase in capital expenditures to $554M, on top of 18.4% revenue reinvested back into R&D efforts in FQ3'22. Long-term investors should be encouraged since these investments are expected to eventually be top and bottom line accretive, further accelerating the company's goal of a $700B TAM.
For now, QCOM still reported a relatively decent Free Cash Flow (FCF) generation at an FCF of $2.34B and an FCF margin of 21.4%. While investors may be concerned about the relatively low cash and equivalents of $3.2B on its balance sheet in FQ3'22, we must highlight that this is attributed to the $4.6B cash paid for the Arriver acquisition. Therefore, not an accurate reflection of QCOM's fundamental performance.
QCOM's Growth Will Normalize While Remaining Highly Profitable
Between FY2021 and FY2024, QCOM is expected to report revenues and net income growth at a CAGR of 13.26% and 18.83%, respectively. Otherwise, 5.04% and 3.21%, respectively, over the next two years. It is evident that the pandemic-driven hyper-growth is coming to an end, similarly reflected in its stock prices now. Nonetheless, it is essential to note that these numbers reflect its steady performance ahead, without suffering a similar downgrade from consensus estimates, such as Nvidia and Intel, since our previous analysis in April 2022.
Furthermore, analysts remain optimistic about QCOM's profitability, given the growth in its net income margins from 18.1% in FY2019, to 26.9% in FY2021, and finally to 31.1% by FY2024, though partly attributed to Arriver. Stellar indeed, since it would be directly translated to its FCF generation and ability in sustaining dividend growth ahead. Assuming a similar FCF margin in FQ3'22, we are looking at an aggressive estimate of up to $10.43B of cash flow generation by FY2024, which would represent an exemplary milestone in QCOM's profitability then.
For FY2022, QCOM is expected to report revenues of $44.19B and net incomes of $14.24B, representing impressive YoY growth of 31.6% and 57.5%, respectively. Consensus also estimates revenues of $11.4B and net incomes of $4.19B for FQ4'22, representing an excellent increase of 22.1% and 50.1% YoY, respectively, despite the perceived softer guidance from the management in its FQ3'22 earnings call. Therefore, long-term QCOM investors have nothing to fear ahead, since the normalization of revenue growth is a natural post-reopening cadence.
In the meantime, we encourage you to read our previous article on QCOM, which would help you better understand its position and market opportunities.
- Qualcomm Is A Strong Buy With Robust Global Demand
- Qualcomm: $700 Billion Market Opportunity - Why We Are Buying
So, Is QCOM Stock A Buy, Sell, or Hold?
QCOM 5Y EV/Revenue and P/E Valuations
QCOM is currently trading at an EV/NTM Revenue of 3.46x and NTM P/E of 10.55x, lower than its 5Y mean of 4.19x and 17.16x, respectively. The stock is also trading at $132.27, down 31.6% from its 52 weeks high of $193.58, though at a premium of 11.8% from its 52 weeks low of $118.23.
QCOM 5Y Stock Price
In the meantime, consensus estimates still rate QCOM as an attractive buy with a price target of $190.45 and a 41.6% upside from current prices. However, we are starting to see some weakness in the sector, especially given the Fed's potentially aggressive rate hikes ahead. The stock will likely continue to retrace over the next few weeks, reaching the time of maximum pain before the Fed's next meeting. As a result, we encourage investors to wait till then, before adding this stellar stock at near bottom levels of $120.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of QCOM, NVDA, INTC, AAPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.
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Comments (17)
Once gain Chinese revenues are linked to OEM, not end customers. If you want to have some real insight, you’ll need to dive into each OEM report and see the geographical split of revenues on the high end smartphone they sell. If not, this is once again misguided information.