In recent times, Qualcomm stock has experienced a decline, currently trading at $153 per share, which is approximately 20% below its pre-inflation shock high of $189 observed in December 2021. However, despite this setback, there is potential for meaningful gains ahead.
The performance of Qualcomm's stock over the past few years can be attributed to a slowdown in the smartphone and tablet market, as consumer spending and demand for computing and mobile devices cooled down following the impact of the Covid-19 pandemic. However, there have been signs of improvement in recent times.
Qualcomm's Q1 FY'24 results, for the quarter ending in December, have exceeded expectations. The company reported a revenue of $9.94 billion, a 5% increase compared to the previous year. Earnings stood at $2.48 per share. Notably, Qualcomm experienced a 16% year-over-year increase in revenue from handsets, reaching $6.69 billion, while automotive sales saw a substantial jump of 31% to $598 million.
Furthermore, in September, Qualcomm announced that it had extended its agreement with Apple to supply modem chips to the iPhone maker until 2026. Although Apple had initially planned to use an internally developed 5G modem starting in 2024, it is now facing some setbacks in its development.
While returning to the pre-inflation shock level would require Qualcomm stock to gain 24% from its current price, it is unlikely to materialize in the near future. The estimated valuation for Qualcomm is around $146 per share, which is roughly in line with the current market price.
Analyzing Qualcomm's performance during turbulent market conditions over the past year, when compared to the 2008 recession, shows that the stock has seen little change. QCOM stock has moved only slightly from $150 in early January 2021 to around $150 presently, while the S&P 500 has grown by approximately 35% over the same period. Overall, QCOM has underperformed the index.
It is worth noting that beating the S&P 500 consistently has proven challenging for individual stocks over recent years. This includes heavyweights in the Information Technology sector such as Microsoft, Apple, and NVIDIA, as well as megacap companies like Google, Tesla, and Amazon.
In contrast, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period. The HQ Portfolio stocks have provided better returns with less risk compared to the benchmark index. This performance is evident in the HQ Portfolio's metrics.
Given the current uncertain macroeconomic environment, with factors like high oil prices and elevated interest rates, there remains a question as to whether Qualcomm could face a similar situation as it did in 2021 and 2022, resulting in underperformance compared to the S&P 500 over the next 12 months. Alternatively, Qualcomm might experience a strong jump in its stock price.
Looking back at the 2007/2008 crisis, Qualcomm's stock declined from $44 in September 2007 to around $33 in March 2009, representing a loss of over 20% of its pre-crisis value. However, the stock did recover to approximately $46 in early 2010, reflecting a rise of nearly 38% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% during the crisis but managed to rally 48% between March 2009 and January 2010.
Examining Qualcomm's fundamentals over recent years, we observe that the company's revenue has risen from $24 billion in FY'19 to $35.8 billion in FY'23. This growth is driven by surging chipset sales during the Covid-19 pandemic, although growth rates have moderated recently due to cooling demand for digital devices following the easing of the pandemic and the remote working trend. Qualcomm's operating margin also increased from 20.5% in 2019 to 21.7% in 2023. Its EPS stood at $6.42 in FY'23.
Regarding its financial position, Qualcomm's total debt has remained relatively unchanged at around $16 billion over the last four years. The company generated $11.3 billion in cash flows from operations in 2023, and its liquidity position, including cash and marketable securities, is close to $12 billion as of the last quarter. Consequently, Qualcomm seems to be in a comfortable position to meet its near-term obligations.
In conclusion, while Qualcomm's stock may benefit from an easing of inflation and the indication from the Federal Reserve of potential interest rate cuts in the coming year, it is also likely to face challenges due to the mixed smartphone market. The company's performance in the next 12 months, whether it underperforms or experiences a significant jump, remains uncertain in the current macroeconomic environment.
