Qualcomm Earnings: Soft Smartphone Demand and Macroeconomic Headwinds Create Buying Opportunity

Qualcomm QCOM reported fiscal second-quarter results in line with our expectations and management’s guidance. However, the firm provided a weaker outlook for next quarter than we had previously anticipated, due to ongoing macroeconomic headwinds and tepid smartphone demand alongside elevated inventories. Despite the industrywide outlook for a recovery in China consumer demand, management said they have not seen evidence of such a rebound, which is consistent with our views. Although we think the next few quarters will be challenging for narrow-moat Qualcomm, we anticipate a return to growth in fiscal 2024. We are maintaining our $140 fair value estimate. Shares fell 7% after-hours due to the disappointing outlook, which we think has created an attractive entry point for long-term investors that can look past an arduous near term.

Second-quarter sales were $9.3 billion, down 17% year over year. Chip sales fell 17% year over year to $7.9 billion with smartphone and Internet of Things weakness partially offset by growth in automotive revenue. Smartphone chip sales fell 17% year over year to $6.1 billion, IoT revenue fell 24% year over year to $1.4 billion, and automotive sales grew 20% year over year to $447 million. Licensing sales fell 18% year over year to $1.3 billion due to lower smartphone unit volumes. Non-GAAP chip EBT margins were 27%, which was at the high end of guidance.

Management expects third-quarter sales to be at a midpoint of $8.5 billion, which would be down 22% year over year and 8% sequentially. Chip sales are expected to be $7.2 billion and licensing sales $1.25 billion. Within its smartphone segment, management sees a larger-than-normal sequential decline for Apple iPhone modem sales, whereas Android handset and automotive revenue are both expected to be roughly flat sequentially, with IoT up in the midsingle digits. For fiscal 2023, we expect sales to be down in the high teens, following two superb growth years in fiscal 2021 and 2022.