Qualcomm: Smartphone Angst Continues (NASDAQ:QCOM)

We remain bearish on Qualcomm (NASDAQ:QCOM). We expect QCOM to be pressured this year by inflationary pressures causing weak consumer smartphone demand and limited pricing power. We believe QCOM's hands are tied with a limited ability to cut prices and boost demand without harming its net income. We're seeing price pressures on smartphone OEMs translate to price pressures on QCOM. Hence, we remain guarded about QCOM in the near-to-medium term. We don't see meaningful revenue growth amid persisting macroeconomic headwinds. We believe QCOM's revenue equation, accounting for its units sold multiplied by the unit price, will see lower units sold amid weak demand or a lower price if QCOM cuts prices. In either case, if QCOM cuts prices or waits out the weaker spending environment, we believe the company's revenue contribution will be lackluster. We wrote on QCOM a while back in June with the bearish sentiment that QCOM's revenue would be impacted by inflationary pressures and weaker consumer demand for its 5G core smartphone and IoT products. We continue to believe revenue growth will be slow on this account; the company's 1Q23 earning results reported revenue of $9,463M, declining 12% Y/Y and missing estimates by $110M. We expect QCOM to see slow revenue growth in the near term as we believe it will take a few quarters for the inventory correction and muted demand for smartphone and IoT products to pass. The company's forecast for next quarter's revenue is between $8.7B to $9.58B, while consensus estimates are on the higher end of this range at $9.41B. We expect QCOM to underperform expectations and the peer group in 1H23. Hence, we recommend investors wait for a better entry point as we see more downside ahead. Smartphone angst pushing into 2023 Our bearish sentiment on QCOM is largely driven by its exposure to the smartphone market, which is struggling amid inflationary pressures and macroeconomic headwinds. In our last note, we expressed concern about the impact of IDC's forecast for declining smartphone demand on QCOM. Declining worldwide smartphone shipments continue to be an issue in 1H23. The IDC expects worldwide shipments to continue to decline to 1.1% growth in 2023, down from 2.8% growth in the last forecast. We don't expect real market recovery before 2024, which puts QCOM's core business in a tough spot. QCOM's 1Q23 reported handset related sales dropping 23% sequentially and 18% Y/Y while IoT sales declined 16% sequentially. The following table outlines QCOM's 1Q23 OCT revenue streams. We're now seeing price pressure throughout the semiconductor supply chain, especially in the smartphone market. We believe QCOM is stuck with weaker consumer demand for 5G smartphones due to the high price and limited ability to lower these prices as semiconductor suppliers have raised prices over the past year. Amid inflationary pressures and spiking interest rates, consumers have less disposable income, so we see less 5G smartphone demand. We believe price pressures for smartphone OEMs will spill into price pressures for QCOM as QCOM cannot lower prices to boost demand without hurting its net income. As a result, we believe QCOM will see more downside in 1H23 and recommend investors wait and monitor the smartphone industry before buying in. Inventory correction creates near-term pressure Inventory correction cycles also pose a near-to-mid-term downside to QCOM as supply-demand dynamics are out of balance. We expect QCOM's financials to be pressured as the industry works to digest inventory built up due to pandemic-led demand. We believe inventory correction, or inventory drawdown, will further pressure QCOM's earnings toward 2H23, especially since the lead time for QCOM's leading-edge nodes is between five to six months for the foundry and chip production. We don't expect to see the inventory correction cycle completed before 2H23. QCOM is relatively cheap, but we recommend investors against buying the stock on weakness. On a P/E basis, the stock is trading at 12.1x EPS $9.88 compared to the peer group average of 21.4x. The stock is trading at 3.7x EV/C2023 Sales versus the peer group average of 5.2x. We recommend investors wait on the sidelines for the near-term downside to being factored into the stock. The majority of Wall Street is bullish on the stock. Of the 36 analysts covering the stock, 22 are buy-rated, 13 are hold-rated, and the remaining are sell-rated. We attribute Wall Street's bullish sentiment to QCOM's position within the broader 5G market and expect Wall Street's bullish on QCOM's long-term outlook rather than near-term performance. The stock is currently priced at $120 per share. The median sell-side price target is $150, while the mean is $152, with a potential 25-26% upside. The following tables outline QCOM's sell-side ratings and price targets. We remain guarded on Qualcomm in the near-to-medium term. QCOM stock is down nearly 21% over the past year, trading 25% lower than its 52-week-high at $161. We expect the stock to creep closer to $100 per share. Despite the attractive valuation, we recommend investors against buying the stock on weakness as we believe the company is facing price pressures due to current macroeconomic headwinds. We will monitor the stock more closely and see how inventory correction and inflationary pressures pan out toward the end of the year. In the longer term, we believe QCOM is well positioned to benefit from the 5G Advanced transition but don't believe QCOM provides a favorable risk-reward at current levels.