Qualcomm Stock: The Outlook Is Rather Grim (QCOM)

Affordable gross sales, earnings, dividends, and low valuations… That is all about Qualcomm (NASDAQ:QCOM) inventory. You may be questioning what’s to not like right here. However the semiconductor trade is experiencing a decline. Qualcomm’s 2Q 2023 outcomes additionally disenchanted many buyers. In this text, I want to clarify why the inventory is just not an excellent purchase proper now.

Qualcomm 2Q 2023 earnings outcomes

Many articles have already been written by Looking for Alpha authors about Qualcomm’s 2Q 2023 earnings outcomes. So, I’ll simply say a few phrases about these with out going into an excessive amount of element. Qualcomm has reported quite disappointing earnings in comparison with the identical interval a yr in the past.

My fellow Looking for Alpha contributor Tradevestor wrote an excellent article on Qualcomm’s latest outcomes. Certainly, the income decreased by 17%, the earnings earlier than taxes declined by 33%, while the earnings per share had been down by 33%. Essentially the most worrying drawback was the quarterly free money stream that declined from $2.7 Billion to -$486 Million year-on-year.

The phase outcomes weren’t good. Neither the QCT (Qualcomm CDMA Applied sciences) nor the QTL (Qualcomm Expertise Licensing) divisions carried out properly. As my fellow Looking for Alpha contributor talked about, solely the automotive phase of the QCT division grew by 20%.

However even worse was Qualcomm’s administration’s outlook. The corporate doesn’t appear to have a really vivid future because of the reality the cellular handset market is just not going by its finest days. The chipmaker lowered its third-quarter earnings and gross sales expectations under its personal earlier estimates.

The administration stated it anticipated the corporate’s earnings to whole between $1.70 and $1.90 a share, excluding one-off gadgets, on gross sales between $8.1 billion and $8.9 billion for its third quarter.

One of many points dealing with Qualcomm is its incapacity to proceed its provides to Apple (AAPL) as regular. QCOM is working to diversify its smartphone buyer base. Proper now Apple makes up about $5 billion of Qualcomm’s annual gross sales. Analysts predict Apple will probably not want QCOM’s modems as early as 2024. Apple acquired Intel’s modem unit in 2019 and there had been hypothesis it might start utilizing its personal in-house elements as early as 2023.

Qualcomm’s EPS and gross sales historical past

Based on SIA, the semiconductor gross sales for the month of March 2023 elevated by 0.3% in comparison with February 2023. Nonetheless, the entire semiconductor gross sales for the primary quarter of 2023 decreased by 8.7%. From the graph under you would see that the semiconductor gross sales are declining.

A few of Qualcomm’s opponents have additionally reported poorer outcomes than the markets had anticipated. The trade’s downturn can proceed for some time.

However let’s additionally take a look at Qualcomm’s earnings and income historical past.

Qualcomm’s annual web earnings and revenues historical past (In Thousands and thousands of United States {Dollars} (USD) besides per share gadgets)

Supply: Looking for Alpha

Qualcomm’s quarterly web earnings and revenues historical past (In Thousands and thousands of United States {Dollars} (USD) besides per share gadgets)

Though 4Q 2022 and 1Q 2023 weren’t sensible, we are able to nonetheless safely say the 2019 – 2022 interval was good. 2022 was even excellent for Qualcomm. All appears good thus far. However let’s examine what basic issues the corporate is experiencing, given its reliance on the smartphone trade.

Worldwide Knowledge Company (IDC) estimates that smartphone shipments won’t develop in 2023. As an alternative, IDC forecasts the shipments of smartphones will decline 1.1% in 2023 to 1.19 billion models, fairly a lower from the earlier 2.8% development estimate because the market continues to undergo from weak demand and ongoing macroeconomic issues. Most of Qualcomm’s gross sales come from the corporate’s QCT (Qualcomm CDMA Expertise) division, and that phase is way too reliant on chips that go into smartphones. However the present smartphone slowdown is just not over. So, it might probably imply additional hardships for Qualcomm’s enterprise.

The inventory can also be underneath strain because of the basic tech sector’s decline and the broader recession fears. However allow us to take a look at the opposite inventory fundamentals too.

QCOM inventory fundamentals

At first look, Qualcomm has fairly sturdy monetary fundamentals.

Notably good are the debt-to-equity, the debt-to-EBITDA, and the curiosity protection ratios. An affordable debt-to-equity (D/E) ratio might be as much as 2. Qualcomm’s D/E is considerably under that. An excellent debt-to-EBITDA is under 10. An indicator of three or 4 is sensible, while Qualcomm’s debt-to-EBITDA is even lower than that. QCOM’s earnings additionally permit it to pay its curiosity many occasions, which can also be vital. All meaning the corporate can simply service its debt.

I’d say Qualcomm’s cash-to-debt ratio is just not sensible however nonetheless fairly affordable, presently standing at about 0.50. In different phrases, Qualcomm doesn’t have an excessive amount of additional money.

The corporate often pays dividends, which is an efficient signal. The chipmaker has been rising dividends for 19 years. QCOM’s dividend yield is standing at about 3%, while the payout ratio is greater than 28%. All meaning Qualcomm’s dividends are sustainable.

Dangers

The dangers are substantial. To begin with, US-China relations are deteriorating quick. You may be considering they was even worse through the commerce conflict. I don’t personally suppose so. To start with, proper now the tensions round Taiwan are rising. Since Nancy Pelosi’s go to to Taiwan, the scenario received much more worrying. There are dangers of an actual conflict because the arms provides are fairly excessive and growing.

It’s a severe risk to Qualcomm because the firm is American and about two-thirds of its revenues are as a result of China.

In my opinion, the risk is severe. To not point out the final recession dangers are excessive proper now. With any substantial decline within the manufacturing sector, the demand for semiconductors will likely be low. Only a fast reminder that they’re important within the manufacturing of smartphones, computer systems, and automobiles. So, Qualcomm is right here to lose as properly.

Nonetheless, the semiconductor trade’s decline might be momentary. It’s potential for the Fed to cease mountain climbing the rates of interest. The truth is, the Fed and different central banks may even begin easing their financial insurance policies if we face extra severe financial issues. Decrease rates of interest will likely be a present for the worldwide economic system, together with semiconductors and Qualcomm. If that occurs, I’ll get extra bullish on the corporate. So, some buyers may view Qualcomm’s inventory worth decline as an opportunity to purchase QCOM shares. However I don’t personally suppose the corporate’s inventory is an actual cut price proper now.

Valuations

Qualcomm’s inventory appears to be comparatively low-cost if we see its latest historical past.

Qualcomm’s price-to-earnings (P/E) ratio is presently simply above 11, fairly good worth for cash, it appears.

QCOM’s price-to-free money stream (P/FCF) ratio is presently close to multi-year lows. But, an indicator above 10 is just not a wonderful worth for cash. Qualcomm’s P/FCF is simply above 17.

Qualcomm’s price-to-book (P/B) ratio of round 6 is sort of excessive. It’s considerably decrease than these of many high-tech companies however nonetheless not low sufficient for QCOM to be a price inventory.

So, QCOM inventory is just not overvalued however is just not too low-cost both.

Conclusion

Qualcomm’s inventory appears to be moderately valued and solely experiencing a short lived slowdown. However the query is how lengthy it might final. Given the decline and geopolitical threats, the inventory is just not very low-cost. Though Qualcomm is an efficient firm, I’d personally take the wait-and-see place.