- Qualcomm reported another strong quarter and guided to strong numbers for FQ4 despite headwinds.
- The wireless chip company is quickly shifting to a massive opportunity in connected chips estimated at up to $700 billion.
- The stock shouldn't trade at only 11x EPS targets.
While Qualcomm ( QCOM ) continues to report strong quarterly results, the market shouldn't be surprised by the semiconductor company getting hit by smartphone demand dynamics. Besides, the stock wasn't trading as if the company would hit massive growth numbers. My investment thesis remains ultra-Bullish on the stock as Qualcomm makes the transition to a connected processor company, playing in a market with a $700 billion opportunity.
Great Numbers
The stock is down ~5% due to some cuts to guidance with weak smartphone demand, especially from the lockdowns in China. Though, investors need to first start with the booming FQ3'22 results :
Qualcomm reported a massive quarter with revenues surging 37% to reach $10.9 billion. The company had another strong quarter in most categories with areas such as Automotive and IoT both growing in excess of 30% to reach combined quarterly revenues of $2.2 billion.
Of course, Qualcomm isn't going to maintain nearly 60% growth in the Handsets business. The global smartphone market has seen a massive boost in premium handset demand following the Covid slowdowns, with the chip company benefitting from higher content on 5G phones along with a pickup of business from Samsung ( SSNLF ).
The investment story isn't just about gaining up to 100% market share of the largest smartphone provider in Samsung. Qualcomm continues to obtain massive orders for the Automotive and IoT sectors. The Automotive business was only $350 million in the quarter, yet the company added $3 billion in the backlog to reach $19 billion.
The market shouldn't fret about a slowdown in smartphone demand when the Automotive business is just booming. At some point, the market has to value the business more based on the backlog than just the current reported revenues. Everyone knows the advanced chip technologies for Automotive are going to grow semiconductor content in vehicles dramatically by 2024/25 when electric autonomous vehicles hit the road in mass.
In this quarter, Qualcomm added a deal with Volkswagen ( VWAGY ) ( VWAPY ) reported by some as worth up to 1 billion euros for automated driving technology. The company already announced big deals with Volvo ( VOLAF ) ( VOLVF ), Honda ( HMC ) ( HNDAF ) and the Renault ( RNSDF ) ( RNLSY ) back at CES in January with a focus on connected and intelligent solutions mostly tied into infotainment systems.
Regardless, the market wants to get tripped up on smartphone demand in the current market. Qualcomm cut the 5G smartphone demand for the year by ~75 million units per CFO Akash Palkhiwala on the FQ3'22 earnings call :
We now expect calendar '22 global handsets to decrease by mid-single-digit percentage on a year-over-year basis, including 650 million to 700 million 5G handsets. Our guidance reflects the continuation of the trends that adversely impacted handset volumes exiting the June quarter.
The wireless chip company guided to FQ4 revenues of $11.4 billion for ~24% growth. The guidance is slightly below analyst estimates as some of the issues in the smartphone market finally caught up with Qualcomm. Again, investors shouldn't fret about some short-term demand dynamics in the low and mid-tier smartphone market, where the company won't obtain as much high margin royalty revenues.
Qualcomm still forecasts QCT revenues growing 27% to reach $9.8 billion. The company now has impressive 33% EBT margins on a business once struggling to move the needle compared to the license business.
The EPS forecast takes about a $0.20 hit from the economic slowdowns. The company still forecasts FQ4'22 EPS of $3+ providing massive profits and cash flows to fuel the large capital returns.
Pause That Refreshes
Qualcomm just went through a period of booming demand, and the wireless chip company is poised for another cycle in the next few years from non-handset markets. The company has already forecast the Automotive sector alone to reach $3.5 billion in annual revenue in a few years, up from a business just topping a $1 billion annual run rate now.
The company plans a 2022 Automotive Investor Day on Sept. 22. The event could provide a catalyst as the company highlights where the business can grow beyond the $3.5 billion revenue target that would still amount to 5.5 years of backlog at $19.0 billion now.
For these reasons, the stock shouldn't trade like a slow-growing value play. Qualcomm trades at only 11x forward EPS targets. The consensus estimates weren't targeting much growth by the wireless chip company over the next couple of years, but Qualcomm is most definitely poised for long-term growth in a booming auto sector where manufacturers continue to struggle to ship new vehicles due to chip shortages.
The company spent several years promising a $7+ EPS target once licensing issues were finally resolved, and Qualcomm quickly delivered a $12+ EPS. Now, the market doesn't appear to appreciate a $12 EPS target, with growth drivers pushing the new connected chip company to the next leg up in earnings when the stock trades below $150.
The Automotive and IoT sectors' growth plans alone should boost EPS $2 to $3 over the next few years, setting Qualcomm on a path to a $15 EPS. Not to mention, the global handset market will only end this year with 5G phones at 50% of the total market, continuing to provide more upside for handset revenue on the shift to 5G.
Takeaway
The key investor takeaway is that Qualcomm isn't correctly priced for the opportunity ahead. The market only values the stock at 11x forward earnings based on short-term headwinds, but the wireless chip leader is heading into a massive opportunity in connected devices in Automotive and IoT, providing the next major growth path. Investors should use any weakness below $150 to load up the stock with a path to trading at a forward market multiple more in the 15x to 20x range.
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Qualcomm: Don't Fret