Qualcomm's disappointing guidance on slow China recovery will force our hand on the stock

Published Wed, May 3 20236:53 PM EDT

Semiconductor maker Qualcomm (QCOM) delivered mixed fiscal second-quarter results after the closing bell Wednesday. But a weaker-than-anticipated handset forecast, which sent shares more than 6% lower in after-hours trading, left us looking to move on as quickly as possible from the small position the Club still holds in the stock. Revenue in the quarter fell about 17% year-over-year to $9.27 billion, beating analysts' forecasts of $9.1 billion, according to Refinitiv. Adjusted earnings-per-share (EPS) dropped 33% on an annual basis to $2.15, matching analysts' predictions. Bottom Line Weakness in the market handset chip sets is expected to pressure Qualcomm's business for a few more quarters, making it harder to justify continuing to own the stock as it navigates this industry challenge. One reason why Qualcomm took its handset unit expectations down for 2023 is due to a slower rebound in China demand, which has become a disappointing theme of the week. Management said it has not seen evidence of a meaningful recovery yet despite the reopening of the world's second-largest economy post-Covid. Since we have a few China consumer plays in the portfolio that are sorting through this issue, we believe it is best to circle the wagons around the ones where we believe market share gains and growth is more evident, like Starbucks (SBUX) or Estee Lauder (EL). Accordingly, we'll be looking to sell off the rest of this small Qualcomm position, which we have trimmed into strength numerous times this year, as soon as Thursday. Quarterly commentary Handset sales in fiscal Q2 increased 6% sequentially, quarter-over-quarter, driven by new launches with Snapdragon 8 Gen 2. However, broader demand remains muted due to too much inventory, hence the nearly 17% decline from last year's Q2, as seen in the table above. The company now sees global 3G, 4G, and 5G handset units in calendar 2023 to be down at least a high single-digit percentage from 2022, a weaker forecast than previously anticipated. In auto , revenues grew nicely, 20% from last year, but it was disappointing to see it fall short relative to the consensus estimate. In the quarter, Qualcomm won 12 new designs across its Snapdragon Cockpit and Snapdragon Connectivity 5G platforms with automakers. While there hasn't been much action in advanced driver-assistance systems (ADAS) yet, management anticipates some new designs in the second half of the year. Internet of things (IoT) revenue was a miss as well, with revenues falling about 24% from last year. Sales were hurt due to the impact the weakening macroeconomic environment has had on demand and an inventory drawdown that's taking longer than expected. Guidance Qualcomm expects its fiscal third quarter revenue to be in the range of about $8.1 billion to $8.9 billion, which at a midpoint of $8.5 billion is well below the consensus of $$9.1 billion. This is a big shortfall relative to estimates, and at the midpoint, it reflects macro headwinds, weaker global handset units and channel inventory drawdown. While there was hope coming into the quarter that handset shipments were approaching a bottom, Qualcomm said Wednesday evening that inventory drawdown dynamics will remain a factor for at least the next couple of quarters. The outlook also reflects a larger-than-normal sequential decline in Qualcomm CMDA Technologies (QCT) revenues, which the company attributes primarily due to the timing of purchases by a modem-only handset customer — likely Apple (AAPL), which is also a Club stock and it reports after the bell Thursday. On earnings, Qualcomm expects adjusted EPS to be about $1.70 to $1.90, which at a midpoint of $1.80, misses estimates of $2.17. (Jim Cramer's Charitable Trust is long QCOM, SBUX, EL, AAPL. 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. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Cristiano Amon, chief executive officer of Qualcomm Inc., in New York, on Friday, Sept. 23, 2022.

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