Qualcomm Earnings: Double Beat Calmed Overblown Fears

Summary

  • Qualcomm restored semiconductor investors' confidence with an impressive double beat on its FQ2'22 earnings card. It also issued robust guidance.
  • The company's diversification strategy is progressing well. In addition, its durable growth profile assuaged investors' concerns over potentially slowing growth.
  • We discuss why QCOM stock still looks attractive despite its post-earnings surge.
  • We reiterate our Buy rating on QCOM stock.
  • I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Newest Innovations In Consumer Technology On Display At 2014 International CES

Justin Sullivan/Getty Images News

Investment Thesis

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.

Hard To Ask For A Better Double Beat

Qualcomm revenue consensus estimates

Qualcomm revenue consensus estimates (S&P Capital IQ)

Qualcomm Adj. EBT consensus estimates

Qualcomm Adj. EBT consensus estimates (S&P Capital IQ)

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.

Qualcomm revenue segments

Qualcomm revenue segments (Company filings)

Qualcomm revenue segments YoY change %

Qualcomm revenue segments YoY change % (Company filings)

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."

Is QCOM Stock A Buy, Sell, Or Hold?

QCOM stock consensus price targets Vs. stock performance

QCOM stock consensus price targets Vs. stock performance (TIKR)

QCOM stock NTM normalized P/E and NTM FCF yields %

QCOM stock NTM normalized P/E and NTM FCF yields % (TIKR)

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).

Do you want to buy only at the right entry points for your growth stocks?

We help you to pick lower-risk entry points, ensuring you are able to capitalize on them with a higher probability of success and profit on their next wave up. Your membership also includes:

  • 24/7 access to our model portfolios

  • Daily Tactical Market Analysis to sharpen your market awareness and avoid the emotional rollercoaster

  • Access to all our top stocks and earnings ideas

  • Access to all our charts with specific entry points

  • Real-time chatroom support

  • Real-time buy/sell/hedge alerts

Sign up now for a Risk-Free 14-Day free trial!

This article was written by

JR Research profile picture
14.21K Followers
Sifting through the ultimate growth stocks for your portfolio

I'm Jere Wang, the principal analyst and founder of JR Research and Ultimate Growth Investing Marketplace service.

Ultimate Growth Investing is curated to help investors achieve 5x to 10x returns over the next five years. 

As a growth-oriented investor myself, I am aware of the challenges investors face in their quest to find the right growth stocks. There are so many high-potential companies in the market. As these are emerging leaders, the due diligence required is even more crucial. All growth investors want multi-bagger returns. Unfortunately, most could hardly find the time to do the necessary work. 

Therefore, our service is here to help these investors. We are full-time investors and traders. We work day-in, day-out to find the best opportunities for ourselves. Now, we are extending those opportunities to these investors through the service. 

If you also prefer someone to do all the hard work for you, I invite you to try out our service. 

Subscribe right now because you get to try out the service for 14 days FREE. Seeking Alpha's unconditional guarantee also protects your free trial. 

Your billing only starts after the free trial. So there's absolutely no risk at all for you to subscribe. Upon subscription, you will have access to all of our investing resources. You will also have access to our Growth Portfolio.

Come and join our community of investors as we navigate the ups and down of the market together. All our best ideas are shared only with our community in the service. Hence, you will not be able to find them on the free site. 

If you have any questions, feel free to send me a direct message. I'm here to help. 

I look forward to connecting with you in Ultimate Growth Investing soon!


More About Me:

I was already a full-time investor and trader before I joined Seeking Alpha as a contributor. I enjoy sharing my experience, knowledge, and mistakes with fellow investors who don't have time to look at the market. It is not a part-time job that I do on the side. I depend on what I do for a living. I take these responsibilities very seriously.

I was previously an Executive Director with a global financial services corporation. I graduated with an Economics Degree from National University of Singapore [NUS]. NUS is Asia's #1 university according to Quacquarelli Symonds [QS] annual higher education ranking. It also held the #11 position in QS World University Rankings 2022.

I'm also a Commissioned Officer (Reservist) with the Singapore Armed Forces. I'm the Battalion Second-in-command of an Armored Regiment. I currently hold the rank of Major.

I love spending time researching high-quality growth companies. That also includes investing time analyzing their price action. In addition, it has allowed me to develop a clear understanding of how institutional investors play their game.

Our best research ideas in the service are highly actionable. We own our best ideas and have skin in the game. Our ideas are not just designed to be a good read. Therefore you wouldn't get abstract theories or concepts from us. You will only get timely and actionable ideas. These are also high probability and workable set-ups with lower-risk entry points. 

My LinkedIn: https://www.linkedin.com/in/jjere/







Follow

Disclosure: I/we have a beneficial long position in the shares of QCOM, AAPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.