Qualcomm shares (NASDAQ:QCOM) is currently trading at $153 per share, about 20% below its pre-inflation shock high of $189 seen in December 2021, and has the potential for significant gains. QCOM saw its stock trade at around $128 at the end of June 2022, just before the Fed began raising interest rates, and is now about 20% ahead of that level, underperforming the broader markets, given that the S&P 500 has risen nearly 33% during this that period. . Qualcomm stock’s difficult performance over the recent past can be attributed to a slowdown in the smartphone and tablet market, amid cooling consumer spending and weaker demand for computing and mobile devices post-Covid-19. However, things have improved recently. Qualcomm reported a better-than-expected set of Q1 FY’24 results (for the quarter ended December). While revenue for the quarter was $9.94 billion, an increase of 5% year over year, earnings stood at $2.48 per share. Qualcomm’s revenue from mobile phones rose 16% year over year to $6.69 billion while car sales jumped 31% to $598 million. Qualcomm also announced in September that it extended an agreement with Apple to supply modem chips to the iPhone maker until 2026. Apple was expected to use an internally developed 5G modem starting in 2024 but is facing some setbacks with its development.
Returning to the pre-inflation shock level means Qualcomm stock will have to gain 24% from here. However, we do not believe that this will materialize soon and evaluate Qualcomm rating to be about $146 per share, roughly in line with the current market price. Our detailed analysis of Qualcomm premium post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over the past year. It compares these trends with the performance of stocks during the 2008 recession.
QCOM stock has seen little change, moving slightly from levels of $150 in early January 2021 to around $150 now, versus a rise of around 35% for the S&P 500 over this roughly 3-year period. Overall, the performance of QCOM stock with respect to the index was lackluster. Returns for the stock were 20% in 2021, -40% in 2022, and 32% in 2023. By comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 24% in 2023 – indicating. that QCOM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – it’s been tough over the past few years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 every year during the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less roller coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and high interest rates, QCOM could face a similar situation as it did in 2021 and 2022 and underperforms the S&P over the next 12 months – or will it see a sharp jump?
2022 Inflation shock
Timeline of Inflationary Shock So Far:
- 2020 – early 2021: Increase in money supply to mitigate the impact of blockade led to high demand for goods; producers unable to match up.
- Early 2021: Shipping crunches and labor shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and are rising rapidly.
- Early 2022: Energy and food prices rise due to the Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index is down more than 20% from peak levels.
- July – September 2022: Fed raises interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- October 2022 – July 2023: Fed continues the process of increasing the rate; improving market sentiments are helping the S&P500 recover some of its losses
- From August 2023: The Fed keeps interest rates unchanged to calm fears of a recession, although another rate hike could remain on the cards.
In contrast, here’s how QCOM stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy (9/15/08)
- 3/1/2009: Approximate bottom from S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (circa 9/1/2008)
Qualcomm and S&P 500 Performance During 2007-08 Crisis
Qualcomm stock declined from $44 in September 2007 (pre-crisis peak) to around $33 in March 2009 (when the markets bottomed), implying that the stock lost more than 20% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $46 in early 2010, rising almost 38% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 2009 in march It then gathered 48% between March 2009 and January 2010 to reach levels of 1,124.
Qualcomm Fundamentals Over Recent Years
Qualcomm’s revenue rose from $24 billion in FY’19 to $35.8 billion in FY’23, driven by rising chipset sales through the Covid-19 pandemic although growth rates moderated of late due to cooling demand for digital devices following the easing of the pandemic and the trend of remote working. Qualcomm’s operating margin rose from 20.5% in 2019 to 21.7% in 2023. Its EPS stood at $6.42 in FY’23.
Does Qualcomm Have Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
QCOM’s total debt has remained roughly flat at about $16 billion over the past four years. The company has obtained $11.3 billion in cash flows from operations in 2023. Given its liquidity (cash and marketable securities) position of close to $12 billion in the last quarter, Qualcomm appears to be in a comfortable position to meet its near-term obligations.
Conclusion
While Qualcomm shares could benefit from easing inflation and the Fed’s recent indication that it could cut interest rates over the next year, the company could be burdened by a mixed smartphone market.
returns | February 2024 MTD (1) |
From the beginning from 2023 (1) |
2017-24 Total (2) |
QCOM Return | 2% | 37% | 132% |
S&P 500 Return | 4% | 31% | 125% |
Hit Enhanced Value Portfolio | 3% | 42% | 628% |
(1) Returns as of 2/11/2024
(2) Cumulative total profit since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.