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Qualcomm: A rare technology value game


As 2022 draws to a close, the slide in the semiconductor sector has defined the market’s notable decline while easing the industry’s significant adverse outcomes.

However, it is in situations like these that potential opportunities arise. While there is still downside risk, buying into the chip pool can provide a pretty good entry point for the patient investor.

After a 40% decline last year, Qualcomm (QCOM) is one of the cheapest semiconductor stocks and an attractive one to buy as it announces new products for the auto industry.

Currently, QCOM is discounted for a reason. After the pandemic brought demand, its biggest smartphone chip business has weakened. Demand for Android devices has been particularly sluggish in China, and the channel stock is now full — needs a couple of quarters to ease. The stock trades at 12x 2023 earnings estimates and 10x next year.

Last Monday, Bloomberg reported that Apple (AAPL) will begin replacing Qualcomm’s iPhone modem chips with its own in-house product as soon as 2024. Credit Suisse notes that Qualcomm’s guidance reflects a 2024 iPhone 16 replacement; The iPhone represents about $4 billion in Qualcomm’s chipset revenue. However, CS believes that Apple’s modem development is independent of its licensing agreement with Qualcomm and that Apple will continue to pay licensing fees because the agreements have been well upheld when challenged in court. .

Wells Fargo downgraded QCOM in December to “underperform,” noting that earnings per share could suffer $1.25 in 2025, stemming from the loss of iPhone revenue. The analyst makes valid arguments about the lack of growth in the smartphone segment, which accounts for 60% of Qualcomm’s revenue.

The worry is that the company will need to rely on high-end Android users, where the transition to 5G has begun to falter. Wells also suspects that diversifying into autos is a big enough opportunity to move the needle.

Wells Fargo can be more than half a cup.

Sentiment and positioning on Wall Street for leveraged handsets couldn’t be much worse, but once the sector bottoms out in the first half of 2023, the second half could be bright. bark much more. China is opening up its economy faster than expected following the post-Covid lockdowns. Plus, Apple’s transition is not a done deal and can easily be pushed out due to technological hurdles.

in Consumer Electronics Show (CES), Qualcomm introduced the Snapdragon Digital Chassis, potentially impacting growth. The Snapdragon Digital Cockpit provides a comprehensive digital solution that integrates the infotainment with the driving system through the SoC architecture to deliver a next-generation experience.

Qualcomm management is targeting $4 billion in automotive sales by 2026, up from $1.4 billion in 2022, driven primarily by the development of advanced driver assistance systems and cockpits. digital. Using Qualcomm projections, auto sales are expected to grow at a compound annual growth rate (CAGR) of 31% during 2022-2026 and 18% CAGR between 2026-31 to reach $9 billion by 2031.

In 2018, Qualcomm embarked on a massive stock buyback, reclaiming nearly 25% of its outstanding shares and re-adjusting its balance sheet from $17 billion in net cash to $10 billion in net debt. billion USD. Acquisitions now have more opportunities, and Qualcomm pays a hefty 2.5% dividend with plans to increase the payout to 8-12% annually. The company returned ~90% of its free cash flow to shareholders last year, divided equally between buybacks and dividends.

Qualcomm is a rare technological value game; a leader in mobility, automotive, AI, consumer and industrial IoT. With stocks and sectors out of favor, stocks are cheap and poised to regain their footing as the smartphone market shows signs of recovery.

The semiconductor group is likely to do well against a reversal in fundamentals, so it’s often worth buying when prices are weak, while stocks are unpopular.

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