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Investors in the big-cap tech sector have been taken on a roller-coaster ride over the past year. Tech stocks fell hard late in 2022 due to rising interest rates and elevated inflation levels, which translated to higher interest expenses and lower margins for the sector. More recently, after a historic first-half performance for the Nasdaq 100 Index ($IUXX) to start 2023, a mixed second-quarter earnings season and signs of a sluggish global economy have weighed on investor sentiment - sparking pullbacks across the stock market over the past month.
Shares of semiconductor giant Qualcomm (QCOM) didn't perform quite as historically as the broader Nasdaq in the first half, but still managed a gain of 8.2% for the period. Since peaking just shy of $133 this past July, though, the stock has shed more than 16%. At its current levels around $111 per share, QCOM is valued at a market cap of $122.17 billion, and the stock offers shareholders a dividend yield of 2.9%.
But is QCOM a good buy on the latest pullback - or just riding the latest wave of share price volatility? Let's take a look.
Is Qualcomm Stock a Buy, Sell, or a Hold?
Qualcomm is best known as a designer and manufacturer of semiconductors and wireless telecom chips. The company enjoys leadership in verticals such as wireless connective, high-performance, low-power computing, on-device intelligence, and RF front-end. It is also the leading processor brand for premium Android-powered smartphones.
While Qualcomm is a major semiconductor player, the tech stock has trailed broader equity markets by a wide margin over the past decade. Since August 2013, QCOM stock has returned 121%, compared to gains of 167% for the S&P 500 Index ($SPX) and 387% for the Nasdaq 100.
The ongoing 5G upgrade cycle is a critical driver for Qualcomm in the near term. A research report from Counterpoint estimates global smartphone sales will hit their lowest point in a decade this year. The smartphone segment accounts for a majority of sales for Qualcomm, and the slowdown in mobile sales has negatively impacted the company’s top-line growth. But as customers will continue to upgrade their devices every few years, the slowdown is unlikely to be a long-term headwind.
In addition to falling smartphone sales industrywide, Qualcomm is on the verge of losing one of its largest customers in Apple (AAPL), which accounts for roughly 10% of sales. Apple has disclosed plans to replace Qualcomm’s modems with its own chips as soon as 2024. Qualcomm is also losing market share to competitors like MediaTek, exacerbating its top-line deceleration.
Qualcomm is now looking to diversify its revenue base, and aims to gain traction in the highly disruptive artificial intelligence (AI) segment - a market that is forecast to surpass $1 trillion by 2030, according to some estimates.
Moreover, Qualcomm's digital chassis allows automotive manufacturers to integrate communication functionalities and driver assistance capabilities in vehicles, further diversifying the company's revenue stream away from telecom. Another driver for the tech giant may be the Internet of Things (IoT) segment, as Qualcomm is already developing chips to power VR headsets for Meta Platforms’ (META) Oculus.
In fiscal Q3 of 2023 (ended in June), Qualcomm's smartphone sales stood at $5.3 billion, followed by IoT revenue at $1.5 billion, and automotive revenue at $434 million. While total sales were down 23% year over year, adjusted EPS fell by 37% in the June quarter.
Semiconductor stocks tend to be cyclical in nature, and analysts expect fiscal 2023 earnings for Qualcomm to decline by 42.5% overall, weighed down by an expected 47.5% drop in current quarter earnings.
What is the Target Price for Qualcomm Stock?
Out of the 22 analysts covering Qualcomm stock, 14 recommend a “strong buy,” 1 recommends a “moderate buy,” six recommend a “hold,” and one recommends a “strong sell.” The average price target for QCOM is $135.95, which is about 22% above current levels.
QCOM stock is priced at 3.5x forward sales and 13.2x forward earnings, which is quite reasonable based on industry averages.
That said, while the recent pullback and relatively attractive valuation might limit the downside risk for investors, Qualcomm should prove that it can stabilize earnings and cash flows across market cycles before it qualifies as a truly enticing investment for shareholders.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
