Qualcomm Stock: Buy The Dip (NASDAQ:QCOM)

Thesis

Qualcomm (NASDAQ:QCOM) fell roughly 10% after the corporate reported a disappointing steering. However this sell-off may present traders with a superb dip-buying alternative, as long-term favorable tailwinds meet short-term macro challenges. Furthermore, the valuation set-up stays very engaging – priced at a one 12 months ahead EV/EBIT of about x8.

Personally, I proceed to consider that QCOM inventory is deeply undervalued. Though I replace my residual earnings valuation framework to account for decrease EPS in 2023 and 2024 on the backdrop of consensus changes, I nonetheless see greater than 30% upside. I stay ‘Purchase’ rated.

Qualcomm’s This fall 2022 Outcomes

Qualcomm’s September quarter was really higher than anticipated, however the firm upset on steering.

From July to finish of September, Qualcomm generated complete revenues of $11.4 billion, which displays a rise of twenty-two% 12 months over 12 months versus the identical interval in 2021. Web-income on a Non-GAAP foundation enhance by 22% respectively, to $3.55 billion ($3.13/share).

From a FY 2022 perspective, revenues enhance 32% versus FY 2021, to $44.2 billion. And Non-GAAP internet earnings jumped 45%, to $14.25 billion ($12.53/share).

Trying on the above numbers, an investor might argue that Qualcomm’s This fall and FY 2022 have been glorious (report 12 months by way of income and EPS). Cristiano Amon, CEO of Qualcomm, commented:

We’re happy to report one other sturdy 12 months, regardless of the macroeconomic challenges, as we proceed to execute our technique of reworking Qualcomm from a wi-fi communications firm for the cell trade to a linked processor firm for the clever edge.

However the issue was with reference to the corporate’s steering, because the CEO additionally added: (emphasis added)

Whereas our monetary outlook is being quickly impacted by elevated channel stock, our diversification technique and long-term alternatives stay unchanged

Disappointing Steerage

After virtually all main semiconductor corporations acknowledge the quickly deteriorating demand setting for chips, following provide chain easing, Qualcomm predicted that Q1 2023 revenues would possible fall between $9.2 billion to $10 billion – versus analyst expectations having anchored round $12 billion.

Qualcomm additionally commented on EPS expectations, which have been preliminarily estimated at about $2.25 to $2.45 per share, multiple third beneath analyst consensus of roughly $3.42/share.

Given the uncertainty attributable to the macroeconomic setting, we’re updating our steering for calendar 12 months 2022 3G/4G/5G handset volumes from a year-over-year mid-single-digit proportion decline, to a low double-digit proportion decline.

The speedy deterioration in demand and easing of provide constraints throughout the semiconductor trade have resulted in elevated channel stock. On account of these elevated ranges, our largest clients at the moment are drawing down on their stock, negatively impacting the mid-point of our EPS steering for the primary quarter of fiscal 2023 by roughly ($0.80). That is the first driver of the variance relative to our prior expectations.

Nevertheless, Qualcomm’s challenges have been termed ‘short-term’, and long run the corporate continues to see sturdy tailwinds in automotive, IoT and VR.

Valuation: Nonetheless Very Engaging

Following Qualcomm’s This fall, I improve my residual earnings mannequin for QCOM to account for preliminary consensus EPS upgrades. Nevertheless, I proceed to anchor on an 10% value of fairness and a 3.25%, terminal progress fee (one proportion level greater than estimated nominal world GDP progress).

Given these up to date assumptions, I now calculate a base-case goal value for QCOM inventory of $146.77/share, versus $157.34 prior.

Right here is the up to date sensitivity desk.

Dangers

As I see it, (aside from short-term macro challenges) there was no main risk-updated since I’ve final lined QCOM inventory. Thus, I wish to spotlight what I’ve written earlier than:

Investing in QUALCOMM shouldn’t be with out threat. First, I wish to spotlight that a lot of QUALCOMM’s progress verticals, together with the metaverse, IoT growth and AI-driving know-how, are entrepreneurial bets. They will pay-off handsomely, however there is no such thing as a assure. Secondly, QUALCOMM is hoping to develop within the knowledge heart server chip know-how, however an necessary associated verdict for the lawsuit with UK-based ARM remains to be pending. Lastly, traders ought to think about that sentiment in the direction of threat property equivalent to shares stays strongly depressed. And given a number of macroeconomic headwinds, QCOM inventory might undergo from share value volatility regardless that the corporate’s fundamentals stay unchanged.

Conclusion

I stay very bullish on QCOM inventory, provided that the corporate’s valuation is now much more engaging in relation to the corporate’s fundamentals – after the sell-off. Furthermore, studying QCOM’s earnings launch and analyst name transcript, I see no motive to count on that the corporate’s long-term outlook darkens, and/or the corporate’s diversification technique to push into thrilling secular progress verticals needs to be impacted by short-term macro-conditions.

That mentioned, though I replace my residual earnings mannequin with decrease EPS expectations till 2025, I nonetheless see greater than 30% upside. Reiterate ‘Purchase’ score with a downward-adjusted $146.77/share goal value.