Qualcomm: Inventory correction will pass quickly (NASDAQ: QCOM)

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Despite a very extensive economic model, Qualcomm (NASDAQ:COMQ) still can’t get past an inventory correction in the cordless handset market. As with many tech stocks, the wireless giant is now trading at near pre-covid levels. My investment thesis is much more bullish on stocks trading near $105 when wireless and IoT opportunities are combined with a $30 billion backlog in autos.

different level

Qualcomm reported FQ turnover4’22 of $11.4 billion was up 22% year-on-year and slightly above analysts’ estimates. The wireless giant hit the EPS target at $3.13 for a monster boost above just $0.78 earned in FQ4’19.

While Qualcomm was not expected to sustain massive growth in the coming year, the boost from automotive and IoT growth engines should offset some declines in handsets. In the fourth quarter, these segments grew revenue by $522 million year-over-year, and demand in the automotive and IoT categories is only expected to increase over the years.

Table of segments

Source: Qualcomm FQ4’22 earnings release

The handset segment always eclipses new growth segments and apparently an inventory correction has hit Qualcomm like other chip companies. The wireless chip company only headed for FQ1’23 revenue of $9.2 billion on the low end after reporting a quarter with revenue of $11.4 billion. Consensus analysts believe revenue is expected to rise further in the December quarter to $12.1 billion.

The sudden drop in stocks has significantly disrupted the quarterly figures. The market will have to spend the next few quarters trying to figure out what normalized demand is, with Qualcomm predicting an 8-10 week supply glut of inventory.

According to Qualcomm, the handset market is facing an almost unprecedented decline this year with a decline forecast of more than 10% in 2022.

Given the uncertainty caused by the macroeconomic environment, we are updating our forecast for calendar year 2022 3G/4G/5G handset volumes from a mid-to-single digit percentage decline of a year-over-year to a low double-digit percentage decline.

What’s odd is that smartphone sales didn’t skyrocket during the covid shutdowns like PCs because most consumers already had phones. In fact, smartphone sales initially plummeted in 2020 due to covid and have not fully rebounded, suggesting the ability to increase demand.

Table of cell phones

Source: sellcell

Qualcomm was increasing handset revenue due to additional content in 5G phones and the return of Apple (AAPL) and Samsung (OTCPK: SSNLF) back to using Snapdragon chips. Essentially, the data does not suggest that Qualcomm is likely to have any lingering impact from this inventory correction and may see a pullback in demand as China reopens from covid lockdowns and smartphone demand normalizes.

On the Call for results FQ4’22CEO Cristiano Amon was quick to point this out:

It is important to note that the current inventory reduction is a cyclical adjustment that has no impact on underlying growth and the company’s long-term earning capacity. And we are in a strong position to manage short-term headwinds.

The executive sees automotive PCs and Snapdragon providing avenues for future growth beyond wireless.

better than the past

Even with the large inventory correction forecast for FQ1, Qualcomm guided to EPS of $2.35. The wireless giant still forecast a massive profit in the quarter with an $0.80 hit from the inventory correction.

The above data suggesting that any drop in handset revenue is only likely to rebound to even higher levels in the future. Investors should not lose sight of record FY22 numbers as a platform for future growth.

Qualcomm still expects automotive revenue to hit $4.0 billion a year in FY26, after the company reported just $1.4 billion in category revenue this year. Automotive growth alone will grow the business by more than ~7% over the next few years, with the backlog supporting significantly higher revenues in subsequent years.

The company faces a scenario in which Apple chip revenue could disappear from FY24, but the tech giant continues to struggle to develop a replacement. Additionally, Samsung is expected to further increase Snapdragon chips to 100% of smartphones this year, somewhat offsetting any risk of losing business with Apple.

Qualcomm earned $12.53 per share last year and investors are unlikely to change expectations for EPS to rise above $13 and $14 per share as previously forecast. The stock only trades at $106, providing a quick disconnect with the market.

Obviously Qualcomm will struggle to recover in the months and quarters ahead due to the stock market these days set in short term hiccups caused by the covid disruptions to the economy, be they good or bad.

Carry

The main takeaway from investors is that Qualcomm is much better positioned than in the past. The wireless chip giant is unlikely to trade at pre-covid levels as even a stock correction does not leave financials close to prior levels.

Investors should clearly use this weakness to reload the stock, although the duration of any stock correction is still very much unknown and will certainly last into the March quarter.