There's no good reason to allocate more capital to chipmaker Qualcomm right now

Published Wed, Nov 2 20227:44 PM EDT

Club holding Qualcomm (QCOM) reported fiscal fourth-quarter results on Wednesday after the bell that matched Street expectations. But an inventory glut led the chipmaker to materially lower guidance, sending shares down 7% in the aftermarket. Revenue increased 22% year over year to $11.39 billion, edging out expectations of $11.37 billion. Adjusted earnings of $3.13 per share, up 23% from the year-ago period, matched expectations. Bottom line Rapid deterioration of smartphone demand, along with an easing of supply chain bottlenecks, resulted in an overabundance of chips. As a result, Qualcomm's first-quarter guidance fell well short of expectations, With management estimating roughly 8 to 10 weeks of elevated inventory in the channel, they believe it "may take a couple of quarters to work itself through." On a brighter note, internet of things (IoT) and automotive results were better than expected and the automotive backlog continues to grow. This represents a significant long-term opportunity for the company beyond handsets: Management estimates a total addressable market opportunity in automotive of $100 billion by 2030. While the future remains attractive and management believes that they are on track to expand Qualcomm's addressable market by more than 7 times to approximately $700 billion in the next decade, we must first get through the next few quarters before anyone begins to care about all the new end markets. There isn't a good reason to prioritize the allocation of capital to the semiconductor industry right now. Anything tech that benefited from a pull forward in demand due to the Covid pandemic is toxic right now. We must be objective about this, no matter how much we believe in Qualcomm. It's why we have been paring back our chip exposure in recent weeks and opted to trim shares of QCOM at $115 in early October. As painful as it was to take that loss, when an industry is this out of favor, there is almost no valuation cheap enough to matter until sentiment shifts. We therefore maintain our 2 rating and are reducing our price target to $130 from $185. Coming into the print, Wall Street was modeling $12.96 in earnings per share for fiscal year 2023. Unfortunately, as soon as you replace the first-quarter EPS estimate coming into the print with the $2.35 midpoint of guidance, that full-year EPS drops to $11.73. Of course, the remaining quarterly estimates aren't going stay where they are; figure those numbers to take a 10% to 15% haircut by tomorrow and you're in the mid-$10 range. Throw on a roughly 12 times multiple, which we think is warranted as we expect some re-expansion as inventory clears out, China reopens and growth reaccelerates and you get a price target of $130. We don't believe that multiple expansion is overly optimistic given that the 5-year average valuation for QCOM is closer to 16 times froward earnings estimates and the longer-term addressable opportunity for Qualcomm is larger than ever thanks to management's diligent efforts to diversify into new end markets. Segment results Qualcomm reports results in two primary segments, Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL). QCT is the semiconductor business most think of when considering Qualcomm's operations and generated the bulk of the company's total sales, while QTL grants licenses to use portions of Qualcomm's intellectual property portfolio. QCT revenue of $9.9 billion, up 28% year over year, was slightly ahead of expectations of $9.8 billion. QCT's earnings before tax margin was 34% in the quarter, representing an increase of 2 percentage points year over year and above the guidance midpoint provided in July. Below is a quarterly revenue breakdown by category. Handsets : Revenue of $6.57 billion, up 40% year over year, was a record. However, it fell short of the $6.58 billion expected. Sales were driven by the strength of its Snapdragon product portfolio. Radio frequency front-end : $992 million, a decrease of 20%, versus $1.04 billion expected. Automotive : Record revenues of $427 million, a gain of 58%, versus $365 million expected. Notably, Qualcomm's automotive backlog — deals they've won that should materialize into revenue in the future — continues to grow, now exceeding the $30 billion number disclosed at company's automotive focused investor day back in September. As a reminder, broad adoption of Snapdragon digital chassis is driving the impressive growth here. Internet of things (IoT): Record revenues of $1.92 billion, up 24%, versus $1.83 billion expected, with growth driven by edge networking and industrial. For QTL, revenues of $1.4 billion, up 1% year over year, missed the $1.55 billion consensus estimate. QTL's earnings before tax margin was 69%, the low end of the guidance range. Qualcomm repurchased about $500 million worth of stock in the quarter. Guidance Management forecast fiscal first-quarter (current quarter) revenues to be between $9.2 billion and $10 billion, which is significantly below expectations of $12.02 billion. Breaking that down a step further, QCT revenues are expected to be between $7.7 billion and $8.3 billion, below expectations of $10.47 billion. QTL revenues are expected to come in between $1.45 billion and $1.65 billion, also below estimates of $1.71 billion. On the bottom line, adjusted earnings are forecast to come in between $2.25 and $2.45 per share in fiscal Q1, significantly below estimates of $3.43 per share. Management also reported a downward revision to its view of handset demand, now expecting a percentage decline in the low double digits, versus the previous expectation of a decline in the mid-single digits. Qualcomm's largest customers are in the process of drawing down inventory, a factor that management estimates to be resulting in a roughly $0.80 per share hit to first-quarter earnings — though it's important to note that even if we add back the $0.80, we would still be below expectations. (Jim Cramer's Charitable Trust is long QCOM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Cristiano Amon, CEO of Qualcomm.

Steve Marcus | Reuters