Well, there really is no industry more hated right now than semiconductors. When it rains in the market, it seems to rain buckets. A stock that has been completely crushed, but is a key supplier to Apple (AAPL), is Qualcomm Incorporated (NASDAQ:QCOM). Qualcomm saw its shares rally a bit on the October rally and then got crushed today with the market and the Fed raising rates again. But he is also struggling after hours after his Q4 just reported.
Street has written off Qualcomm stock, and it is teetering just above levels not seen since we began emerging from COVID lockdowns in the spring of 2020. newly reported earnings, show earnings were mixed, but are seeing weakening demand. They have planned spending cuts to ensure profits are sustained. They are exploited in the market for high-end phones. The relationship with Apple is maintained, but there are inventory problems. Semiconductor stocks as a whole have been completely decimated, and this report is another dagger in the hearts of shareholders. The quarter was good, but the outlook for the first quarter was dire. Let us discuss.
Qualcomm’s fourth quarter earnings were pretty good
Make no mistake, we have seen a slowdown in the economy. Tech names are cyclical, but chips are a bit more secular. Look, despite the stock crash, Qualcomm is not going to go bankrupt. But it’s not good right now either. We will say that there are safer semiconductor bets, although the entire sector is in disgrace. But with this report, the headlines were really hard to swallow. Even with such weak headlines, the stock yield is close to 3% now, and that will help attract some risk-seeking buyers. There are many fundamental challenges facing the company, although the fourth quarter itself was good:
So, as you can see, revenue was up 22% from the previous year. However, margins tightened again, as evidenced by the fact that net income was barely up, although when adjusted it kept pace with adjusted income. The company has a cost problem and made a commitment on the conference call to cut costs. That is positive. Earnings were solid at $3.13 per adjusted share and actually met estimates while exceeding the top line. But it was the outlook that was simply bad, leading to after-hours selling.
The market has priced in a lot of pain, but once again the fourth quarter earnings release documented a continued weakening environment and that their customers are having inventory issues:
” Our calendar year 2022 3G/4G/5G mobile phone volumes from a mid-single-digit percentage decline year-over-year to a low double-digit percentage decline. Rapidly deteriorating demand and easing restrictions on supplies in the semiconductor industry have resulted in elevated channel inventory. Due to these elevated levels, our largest customers are now reducing their inventory.”
So what does this mean? It means that the first quarter will see lower demand, pressure on the top line and of course pressure on the bottom line. The targeting was reduced because your customers will reduce your inventory. They reduced their midpoint profit by $0.80. That’s a nasty cut.
Folks, this reduced outlook falls far short of expectations. In fact, the revenue outlook is 20% below the $12 billion consensus. That’s really painful for longs, and gains were also guided lower from $3.43. There’s not much to say about this, other than that the company considers the slowdown to be quite temporary. Listening to the conference call, management said it is committed to reducing expenses to help preserve operating margin.
While the earnings squeeze is hard to see, the valuation, even if earnings are 20% lower by 2023 than originally thought, the stock is attractive, especially as it will remain a key supplier to Apple. . While the financial outlook is temporarily affected by elevated channel inventory, we believe the company’s diversification strategy, cost reductions and long-term opportunities suggest the stock is attractive below $100.
Looking to the future
Even with shareholder destruction over the last year, from where we are now, the valuation, even with the dips, is still quite attractive. We think that when it comes to P/E, PEG, EV/Sales, EV/EBITDA, and P/C metrics, the stock is looking good, even with the forecast decline in the first quarter. The company is not losing money, even though the lower outlook justifies the price the market was giving these shares. We will have a 3% yield soon, we have a market that points to rate hikes slowing down in 2023, and tokens, while not hot, are likely to catch strong bids next year before the next cycle hike. The market will price these shares higher well in advance.
The company is taking steps to improve its tax status. The dividend seems certain. The sector is cyclical despite continued secular demand. It’s been a tough year for shareholders, but we believe that as the stock falls below $100, we have a long bias.
your thoughts matter
Do you think there are many more disadvantages here? Is the stock still overvalued? Will mobile phone demand collapse and future directions be poor? Is sub $100 attractive in your opinion?
Let the community know below.