Qualcomm: Downgrading To Sell – Higher Risk Profile Into 2024 (NASDAQ:QCOM)

We’re downgrading Qualcomm (NASDAQ:QCOM) to a sell. While analysts are now making the value case that QCOM has bottomed out and now stands to benefit from the opportunity in A.I. and automotive, we disagree. We now see a higher risk-reward profile for the company into 2024 due to two main factors: first, possible market share loss with Android customers to Huawei after the low-profile and surprising launch of the Mate 60 Pro smartphone, and second, the impending threat of Apple (AAPL) moving to an in-house solution.

Along with these headwinds is the demand weakness pressuring QCOM’s core businesses; in 3Q23, QCOM’s headset-related revenue declined 14% QoQ and 25% Y/Y to $5.26B. We estimate the 2023 smartphone TAM to decline 5-15% Y/Y revised down from 0-5%; we’re forecasting a 10% Y/Y drop. Weaker China end demand is negatively impacting the 2023 smartphone TAM, considering China is the biggest market for smartphones and PCs. Management expects sales to remain flat sequentially next quarter at $8.1-8.9B, trailing consensus estimates of $8.70B. QCT sales are also likely to remain in the $6.9-7.5B range next quarter due to muted demand from both Apple and Android markets. While the smartphone weakness has been somewhat priced into the stock, we don’t think the near-term headwinds from share loss and Apple pulling away have been priced. We expect the stock to underperform further into 2H23 and 2024.

The following outlines QCOM’s stock performance over the past six months against the S&P 500.

Here’s why not to buy the dip

Management is shifting focus to A.I. and automotive, given the seemingly unyielding weakness in smartphone and IoT markets. QCOM is trying to position itself as a meaningful player in the A.I. space by announcing new in-vehicle generative A.I. capabilities; we don’t think the A.I. ambitions will offset near-term demand weakness in its core segments. Aside from the mixed demand environment in smartphones and IoT, QCOM is also facing uncertainty with one of its biggest customers, Apple; the threat of Apple replacing QCOM with in-house solutions is pushing management to diversify, in our opinion. CEO Cristiano Amon has confronted and confirmed the threat, stating, “We don’t have visibility whether we’re going to be in the iPhone in ’24 or not.” We see downside risk for QCOM if Apple turns away in 2024, which is increasingly likely.

QCOM still remains a top provider for modems in Android phones, but we see more pressure there, too. Huawei launched its new Mate 60 Pro equipped “with its homegrown Kirin 9000s SoC built by SMIC (China’s largest foundry) using its 7nm process node.” Mate 60 Pro was a surprise for the entire industry because it wasn’t clear that SMIC had the equipment to build quality 7nm chipsets for smartphones after the series of bans on China, including a ban from ASML (ASML) EUV tools. The new smartphone was specifically a negative surprise for QCOM. We expect QCOM to lose market share to Huawei with Android customers; analysts have already begun speculating that QCOM’s shipments to China in 2024 will be lower than this year and will drop Y/Y. We see a higher risk profile for QCOM and recommend investors sell the stock.

Valuation

QCOM is cheap relative to the peer group average. On a P/E basis, the stock is trading 13.5x C2023 EPS $8.52 compared to the peer group average of 30.6x. The stock is trading at 3.8x EV/C2023 Sales versus the peer group average of 5.9x. While valuation is tempting, we recommend investors against buying the stock on weakness; we see more downside risk into 2024.

The following chart outlines QCOM’s valuation against the peer group average.

Word on Wall Street

Wall Street is bullish on the stock. Of the 35 analysts covering the stock, 23 are buy-rated, 11 are hold-rated, and the remaining are sell-rated. We think Wall Street likes the stock due to exposure to Apple’s new model launch and expectations that the current headwinds are priced in at current levels. We disagree; we think the stock’s risk-reward profile into 2024 is less favorable.

The stock is currently priced at $115 per share. The median sell-side price target is $140, while the mean is $142, with a potential upside of 21-23%.

The following charts outline QCOM’s sell-side ratings and price-targets.

What to do with the stock

We are downgrading QCOM to a sell; we recommend investors don’t join the bottom fishers as we don’t think this is the bottom. We see more near-term headwinds pressuring QCOM’s financial performance into 2024. We see a higher risk profile for the stock due to competition in the Android market and the potential loss of Apple’s business. We don’t think the shift to edge computing and automotive can save the stock from demand weakness in 2H23. We recommend investors explore exit points at current levels.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.