Qualcomm Q2: Weak But I Am Staying

Qualcomm Incorporated (NASDAQ:QCOM) has just declared its Q2 earnings as covered by Seeking Alpha here. EPS missed by a whisker while revenue beat by a healthy $150 Million. But Q3 guidance was lower than expected, and this has sent the stock sharply lower, down ~7% in addition to the ~3% it lost during regular trading on Wednesday.

Let's evaluate the Good, Bad, and Ugly from this report with an eye towards the stock's short to medium term future.

Good

This is going to test me as a writer. But I'll try.

• Qualcomm CDMA Technologies' ("QCT") overall revenue declined by 17% YoY but the lone bright spot was that the Automotive segment grew by 20% as shown below. This is key as the Total Addressable Market ("TAM") for Automotive is expected to reach $100 Billion by 2030.

• Operating expenses came in below the company's guidance by almost $80 Million. In an environment where demand and inflation are going in the wrong direction, Qualcomm reigning in on the expenses is a good sign. In the event that things get uglier, I fully expect Qualcomm to get even more disciplined with its expenses.
• Qualcomm was already trading at a relatively cheaper valuation compared to most of its industry peers. This sell-off has made the stock even more attractive for the value and bargain hunters (as covered in the conclusion below). There is little doubt that the short-to-medium term will be rough for investors but Qualcomm's cyclical nature is well documented. I personally recall investing in such lows in the past that I made 2x or 3x within a year or two when things recovered.

Bad

• I might as well say the entire Q2 was bad and move on. But, a picture is worth a thousand words. In this case, maybe millions.
  • Revenue -> Down 17%
  • Earnings Before Taxes -> Down 33%
  • Earnings Per Share -> Down 33%
  • Stock -> No wonder, it is down nearly 7% as I write this.

• As a result of the after-hours sell-off, what was already a weak stock technically, became weaker as shown below. The current price of $105 is a good 15% below the 200-Day moving average and this suggests a new low is likely to be established. Given recent numbers from industry peers like Advanced Micro Devices (AMD), I don't think analysts will be rushing to Qualcomm's aid here and the stock is likely to weaken further over the next few days.

Ugly

• I was in a dilemma about whether this belongs in the "Ugly" or the "Bad" but given the importance of this segment, this belongs here. QCT weakness in Q2 and expected weakness going forward was highlighted by the company many times on the earnings release and call.

Additionally, Qualcomm (QCOM) said it expects to see "a larger-than-normal" sequential decline in revenue for its QCT division, which includes most of the company's mobile-phone chipsets and other mobile device products."

What is more telling is that Qualcomm (nor anyone) has any idea or control over when it will get better. Why do I say so? Because as the company stated "macroeconomic headwinds, weaker global handset units, and channel inventory drawdown" are affecting the demand. Basically, the whole world, Qualcomm's private world, and their house are all contributing to this. The silver-lining may be the fact that the company said the projected QCT weakness is at least partially attributable to the timing of purchase by a customer. In other words, delayed but not denied?

• Quarterly Free Cash Flow ("FCF") went down from $2.7 Billion to -$486 Million YoY. To get a perspective of how rare this, Qualcomm has reported negative FCF in just five other quarters going back to 2010. History suggests this is unlikely to be a trend but it is important to keep an eye on this number as the company just recently increased its dividend payment to 80 cents a quarter. That means, on average, Qualcomm needs to generate about $900 Million in quarterly FCF just to cover its dividend commitment based on total share count of 1.115 Billion. That said, given the company's dividend growth history, and overall strong balance sheet, dividend coverage is the least of my worries right now
• More than the Q2 numbers, I believe Q3's guidance hurt the stock more. Qualcomm's revenue guidance of $8.1 B to $8.9 Billion was well short of the expected $9.12 Billion. Similarly, the guided EPS range between $1.70 and $1.90 was once again well short of the expected $2.13 per share.

Conclusion

So, where does the stock go immediately? Hard to say. But, as someone who has followed Qualcomm for a very long time, I can say this. Qualcomm is a cyclical company, there are no two ways about it. When the light shines on them, they are the brightest and the market loves them. When things turn down a bit, the market tends to beat then down much worse than the competitors get beat. But there are enough compelling reasons to stay invested with Qualcomm here. I may be tempted to add should the stock go below $100, which would push the yield well past 3%. If 2024 EPS estimates hold true, the stock is trading at a forward multiple of about 9.