Qualcomm stock: too much fear, buy this withdrawal (QCOM)

Ethan Miller

Thesis

Qualcomm Incorporated (NASDAQ: QCOM) the stock has underperformed the broader market since our post-earnings update stressing that investors should be cautious and wait for a pullback first. Thus, QCOM posted a return of -14%, compared to the SPDR S&P 500 ETFs (SPY) 5% decrease since our article. The general weakness in stocks of semi-finished products also affected QCOM. Coupled with recent US export controls on data centers and AI-based GPUs that sent AMD (AMD) and Nvidia (NVDA) shares fall, we think QCOM looks more attractive now.

Notably, QCOM has given up most of its gains from its July rally as it nears its June lows. Consequently, it has come very close to QCOM’s critical support zone ($118), underpinning its strong consolidation range since early 2021.

Qualcomm also faced worsening macro headwinds from weak end-spend in Android smartphones. Coupled with a recent lawsuit filed by Arm against Qualcomm’s Nuvia division, some investors may be concerned about the progress of Qualcomm’s budding ambitions in Arm-based CPU chips. In addition, arch-rival MediaTek (OTCPK:MDTKF) is also deliberately getting into IoT chips, forging a partnership with Intel (INTC) in a bid to take on Qualcomm.

Despite recent market pessimism on semi-equities, we are confident that QCOM likely hit its mid-term low in June. Therefore, we are ready to reassess QCOM and urge investors to consider starting to increase their exposure with the deep hindsight.

Accordingly, we are revising our rating on QCOM from Hold to Buy.

Qualcomm could face other smartphone headwinds

Despite the weakness in the end market for Android devices and the marked slowdown in China, Qualcomm’s device business continued to perform admirably. As a reminder, revenue from its handset segment grew 59.2% year-over-year during the third quarter of 2022, compared to 55.6% in the second quarter. As a result, the growth cadence of Qualcomm’s most critical revenue driver remains robust, despite the headwinds facing its downstream partners.

However, DIGTIMES reported that Qualcomm and MediaTek could face additional pressure from their OEM partners to cut prices, given the continued weak consumer outlook, compounded by recession and economic headwinds. ‘inflation. Additionally, key Qualcomm partner Samsung (OTCPK:SSNLF) may revise its H2’22 shipment outlook, renewing fears of a mobile hotspot price revision. DIGTIMES reported:

It has been reported that Samsung is likely to lower its smartphone shipment target for the fourth quarter of 2022. This, coupled with demand for hotspot price cuts by China-based handset brands, hotspot vendors Mobile access providers may not be able to withstand the mounting pressure and start cutting their AP prices in the fourth quarter. Most chip vendors believe their customers are unlikely to place more orders, even if chip prices are reduced, given weak end-market handset demand. Sources familiar with the mobile hotspot industry said the two major hotspot vendors are reluctant to lower their quotes due to their production costs and handset brand inventory levels. – FIGURES

Qualcomm adjusted gross margins % and adjusted EBITDA margins % consensus estimates

Qualcomm adjusted gross margins % and adjusted EBITDA margins % consensus estimates (S&P Cap IQ)

Nevertheless, consensus (bullish) estimates indicate that the impact should not be significant, as they predict that Qualcomm’s profitability profile may have bottomed out at FQ3.

Given Qualcomm’s leadership position in high-end mobile hotspots and its strong partnership with Samsung, we think the estimates are believable. Management has also not highlighted any weakness observed in its pricing. However, we urge investors to carefully analyze Qualcomm’s FQ4 commentary for any weaknesses in its ability to maintain its price leadership.

QCOM rating has been reduced

QCOM has also come under additional pressure as Arm filed a lawsuit alleging Qualcomm’s Nuvia unit lacks valid licenses to pursue its Arm-based processor ambitions. However, we don’t believe QCOM’s recent weakness is directly related to the above lawsuit, given the general pullback in semi-financial stocks.

However, QCOM could continue to be under pressure, given Nuvia’s importance to Qualcomm’s ambitions to go beyond smartphones. Furthermore, rumors of Qualcomm’s data center plans are also based on the success of its Arm-based chips. Therefore, the lawsuit is not constructive for Qualcomm in the short term. Still, it’s imperative that CEO Cristiano Amon and his team resolve the issue with Arm eventually, given Qualcomm’s diversification strategies.

QCOM EV/NTM EBITDA valuation trend

QCOM EV/NTM EBITDA valuation trend (Koyfin)

It’s pretty clear that QCOM has been significantly underperformed by the market from its early 2022 highs. As a result, it has struggled to regain its bullish bias above its 10-year NTM EBITDA average, as shown above. However, we are confident that its July low, in line with the standard deviation zone below its 10-year average, should hold firm.

Therefore, we are not concerned with QCOM’s recent bearishness and view the deep pullback as an opportunity for investors to consider adding more positions as it closes near this zone.

Is the QCOM stock a buy, sell or hold?

QCOM Price Chart (Weekly)

QCOM Price Chart (Weekly) (TradingView)

QCOM has moved closer to its June/July lows, which has supported its consolidation zone since the start of 2021. However, we believe the lows should hold, given Qualcomm’s strong profitability profile. and its well-controlled valuation.

Therefore, investors may consider increasing their exposure during the pullback, despite short-term downside volatility. If price action on the potential retest of its June/July lows is constructive, indicating downward rejection, investors may consider becoming even more aggressive.

We are revising our rating on QCOM from Hold to Buy.

About Chris McCarter

Check Also

Russia’s economy won’t recover from war in Ukraine ‘until 2030s’

ghello. There is more dire economic data this morning, as retail sales fell at the …