Ethan Miller
Elevator Pitch
QUALCOMM Incorporated’s (NASDAQ:QCOM) shares are worthy of a Buy investment rating in my opinion.
In my earlier October 6, 2022 update for QUALCOMM, I focused on the company’s diversification efforts and the stock’s valuations. With this latest article, my attention turns to QCOM’s outlook for 2023.
Worldwide semiconductor revenue is projected to see a decline next year, and it is inevitable that QUALCOMM’s top line and earnings will also witness a contraction. But QCOM’s current valuations have factored in the decrease in the company’s revenue and bottom line for 2023, and there is a good chance that QUALCOMM’s actual FY 2023 financial performance might surprise on the upside. In that respect, I think that QUALCOMM warrants a Buy rating.
How Has Qualcomm Performed In 2022?
With 2022 coming to a close, it is relevant to review QUALCOMM’s year-to-date share price performance.
In 2022 thus far, QCOM’s shares have dropped by -36.1%, and the stock has also done much worse than the S&P 500 (-18.0% decline) in the same time period.
QUALCOMM’s metrics relating to the company’s forward-looking guidance help to explain why the company’s shares have underperformed this year. This is the topic of the next section of this article.
QCOM Stock Key Metrics
QCOM outlined the company’s management guidance for the first quarter of fiscal 2023 (YE September 30) as part of its Q4 FY 2022 earnings announcement.
Based on the mid-point of its guidance, QUALCOMM expects to report revenue of $9.6 billion and a normalized earnings per share or EPS of $2.35 in Q1 FY 2023. This means that QCOM is forecasting that the company’s Q1 FY 2023 top line and bottom line will decrease by -16% and -25%, respectively in QoQ terms.
More significantly, Wall Street analysts had previously anticipated that QUALCOMM would be able to perform much better and achieve a revenue of $12 billion and a non-GAAP EPS of $3.43 in the first quarter of fiscal 2023 as per S&P Capital IQ data.
As such, it isn’t a surprise that QCOM’s year-to-date share price performance was poor. The market was worried about QUALCOMM’s business outlook in view of the challenging macroeconomic environment, and investor concerns were validated by QCOM’s disappointing Q1 FY 2023 guidance.
QCOM noted at the company’s Q4 FY 2022 earnings call that the below-expectations Q1 FY 2023 guidance is attributable to a “drawdown of channel inventory” and “weaker end-market demand and foreign exchange headwinds.” QUALCOMM also acknowledged at the most recent quarterly results briefing that the company’s “near-term financial outlook is impacted by the challenges facing the semiconductor industry.”
In the subsequent section, I highlight certain market forecasts for the semiconductor industry next year.
What Is The Semiconductor Industry’s 2023 Outlook?
A November 28, 2022 Seeking Alpha News article cited research from Gartner (IT) indicating that “global semiconductor revenue is projected to decline 3.6% in 2023 to $596B” as compared to an expected +4% growth for this year. Specifically, Gartner holds the view that “smartphone, PC and consumer electronics production” will be badly hit by the “negative economic outlook.”
Gartner isn’t the only one that is bearish on the semiconductor industry’s prospects for the following year. World Semiconductor Trade Statistics or WSTS is projecting that the global semiconductor industry will experience a “4.1% decline in 2023” as highlighted in a separate November 29, 2022 Seeking Alpha News report.
I discuss QCOM’s potential financial performance in the following year in light of the dim outlook for the worldwide semiconductor market as a whole.
How Is Qualcomm Expected To Perform In 2023?
According to the consensus financial figures sourced from S&P Capital IQ, Wall Street sees QCOM’s top line and normalized EPS contracting by -9% and -19% to $40.2 billion and $8.50, respectively for full-year FY 2023.
I agree that QUALCOMM won’t perform as well in 2023 as it did in 2022, but I still think that the sell-side analysts are way too bearish about QCOM’s fiscal 2023 outlook.
In my opinion, QCOM’s actual fiscal 2023 results should come in above the market’s expectations due to three key reasons.
Firstly, the “drawdown of channel inventory” which drove weaker-than-expected Q1 FY 2023 guidance for QUALCOMM (as mentioned in an earlier section of this article) will become less of a headwind for QCOM in subsequent quarters. The company emphasized at its Q4 FY 2022 investor call that it expects “more than half of the inventory drawdown (to be) completed” in the first quarter of the new fiscal year.
Secondly, QCOM’s ongoing diversification efforts are expected to have a positive impact on the company’s fiscal 2023 performance. QUALCOMM’s automotive business recorded a strong +58% YoY revenue growth in Q4 FY 2022, and the company has guided for its automotive business to achieve positive top line expansion in FY 2023. QCOM’s automotive business is a beneficiary of structural tailwinds like increased EV (Electric Vehicle) penetration and seems to be much less affected by cyclical factors as compared to its handsets business.
Thirdly, QUALCOMM could potentially derive higher than expected revenue from its client, Apple (AAPL) than what was earlier expected. At its most recent quarterly earnings briefing, QCOM raised its assumptions for the company’s “share of 5G modems for the 2023 iPhone launch” from “20%” earlier to “the vast majority.”
As such, I expect that FY 2023 will be a challenging year for QCOM, as it is very likely that the company will see its revenue and earnings drop in the following year in line with the global semiconductor industry weakness. But I think the actual rate of decline for QUALCOMM’s FY 2023 top line and bottom line will be less severe than what the market is anticipating.
What Do Analysts Believe About QCOM?
The sell-side analysts believe that QCOM’s shares should be worth much more than what they are currently trading at, and I share the same view.
The average sell-side analyst price target for QUALCOMM is $152.76, which translates into an upside of +28% as compared to QCOM’s last done stock price of $119.05 as of December 9, 2022.
I am of the opinion that QCOM’s consensus target price is realistic.
QUALCOMM is currently valued by the market at a consensus forward next twelve months’ normalized P/E multiple of 11.7 times based on S&P Capital IQ’s valuation data.
A target price of $152.76 is equivalent to a consensus forward next twelve months’ normalized P/E multiple of 15.0 times. In comparison, QUALCOMM’s 10-year mean forward P/E is 15.3 times, and the stock has traded as high as 24.8 times forward P/E in the past decade.
Is QCOM Stock A Buy, Sell, or Hold?
QCOM’s stock is deserving of a Buy rating in my view. QUALCOMM’s current valuations are undemanding, and the company’s shares have significant upside considering my assumption that its fiscal 2023 results should come in ahead of expectations.
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