QUALCOMM Incorporated (NASDAQ:QCOM) just reported its FQ2'22 earnings with a resounding double beat, coupled with robust guidance. It was a much-needed reprieve for the semiconductor industry, as most leading players remain mired in a bear market. The market had digested their massive 2020-2021 gains amid ongoing supply chain disruptions. Furthermore, the environment had been worsened by China's COVID lockdowns and the Russia-Ukraine conflict, both impacting consumer end demand.
Therefore, we believe semi investors undoubtedly welcomed QCOM's impressive performance. Moreover, it showed that fears about a steep fall in demand had been overstated. Given Qualcomm stock's attractive valuation, we discuss why it remains a Buy after its FQ2 earnings beat.
Qualcomm reported revenue of $11.16B, up 40.8% YOY (beat consensus: $10.6B, up 33.8% YOY). It also reported adjusted EBT of $4.26B, up 68.4% YOY (beat consensus: $3.89B, up 53.8% YOY).
Hence, we think it was a resounding double beat on both lines for CEO Cristiano Amon & team. Furthermore, its adjusted EBT margin of 38.1% (GAAP EBT margin 35%) was also ahead of the 36.7% consensus estimates. We could hardly find any notable weakness in Qualcomm's robust performance. It seems like the fears over the leading semiconductor players were overstated.
Furthermore, its growth was broad-based across its primary segments, as seen above. Handsets continue to be the critical revenue engine, as the segment accounted for $6.33B of FQ2 revenue, up 55.6% (representing 66.2% revenue share).
Notwithstanding, analysts on the call remained concerned over the sustainability of handsets forward performance, given the recent headwinds in China. However, management remained confident in the resilience of its handsets segment. CEO Amon accentuated that (edited):
We provide an entire Snapdragon platform for Samsung (OTC:SSNLF) with AI, GPUs, CPUs, and a lot of silicon content plus RF front end. And going forward, we expect our relationship with Samsung only to increase. So we're very pleased. And I think it reflects that the strategy is working. We've been focused on premium and high-end. So, it's a story of share gains with Samsung and share gains in China as well. We're not that exposed to the lower-tier market which is a bit soft. Because our strategy is to be really focused on premium and high-end and in the value share of the market. (Qualcomm's FQ2'22 earnings call)
Keen investors should know that China's COVID lockdowns have created significant uncertainty in the market for consumer electronics. Of notable concern was the end demand for low-end smartphones. Therefore, we think Qualcomm should have assuaged investors' worries with its reassuring commentary.
Furthermore we also parsed Qualcomm's arch-rival MediaTek's (OTCPK:MDTKF) recent earnings card. We observed that its management commentary was similar to Qualcomm's. MediaTek highlighted that there are significant opportunities in continuing to leverage the 5G upgrade cycle outside of China, as management believes "shipments could double." Therefore, any China weakness should be mitigated by revenue ex-China. As such, we think the market and semi investors may have gotten unduly perturbed over Qualcomm's China exposure. Amon articulated (edited):
We pointed out that in China it represented 20% of the market. The premium tier devices, whether Vivo, Oppo, Xiaomi, Honor, Huawei for 4G as well as devices such as Samsung, they're all powered by Qualcomm. And that is why we've been benefiting of growth in a richer mix of premium and high. We're not that much impacted by the low-tier units. And we've been less interested in commodity units in the handset business. Having said that, regardless of what's happened in the China market, I think the story on IoT is strong. The story on auto is strong and all of the new businesses are accretive to margins. (Qualcomm's earnings)
And Qualcomm's diversification has been progressing very well. Management updated that the automotive design pipeline has swelled to $16B. Its autonomous driving solution has also been enhanced by its recent Arriver acquisition. It also saw significant traction in industrial IoT. However, analysts on the call remained tentative over the potential loss of Apple's (AAPL) networking chips business moving forward. As a result, we could also observe the declining growth trend through FY23 in the revenue estimates chart above.
This could be it if there were somewhat of a headwind from Qualcomm's Q2 card. Deutsche Bank analyst Ross Seymore commented (edited): "Questions around the sustainability of Handsets segment growth in the long term remain due to potential Apple revenue loss exiting 2023. However, we believe the setup for continued growth for H2'22 remains strong as all the drivers for H2 are joined by typical seasonality and incremental supply."
QCOM stock remains a Buy after earnings. Notably, the stock has surged to $144 at writing as the market cheered its impressive earnings beat. Management also issued reassuring guidance for FQ3, as it estimated revenue of $10.9B, up 36.3% YOY (beat consensus: $10.27B, up 28.5% YOY).
Therefore, we think investors appreciated the visibility and robust guidance as Qualcomm continues to demonstrate a "durable" growth profile.
Furthermore, QCOM stock NTM FCF yield and normalized P/E also look attractive. We explained in a previous article the smartphone valuation tagging attached to QCOM stock. However, we believe the company's strong progress in its diversification strategy should see it re-rated in line with Broadcom (AVGO) stock over time, as seen above.
Moreover, despite its post-earnings surge, the stock last traded below its most conservative price targets ($150).
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