Why Qualcomm rallied on Friday

What happened

shares Qualcomm (QCOM 3.31%) It was rising on Friday, up more than 3.3% the day it was NASDAQ Composite It actually finished a little red.

Qualcomm has been trying to diversify its automotive chip and Internet of Things businesses in recent years, but it still gets the lion’s share of revenue and profits from its mainstream mobile modem chip business and technology licensing for mobile phones.

While the global mobile phone industry has been in the doldrums for the past year following the pandemic boom, a Wall Street analyst today began a report on Qualcomm with a more optimistic view.

so what

On Friday, Wolfe Research commenced coverage of Qualcomm, giving the stock an outperformance rating and a price target of $145, compared to a share price of $121 at the start of the day’s trading.

Wolfe says the phone market is at or near the bottom of the downward spiral that has plagued most chip companies over the past year. Qualcomm, for its part, has been shipping fewer chips to device makers than end customers actually consume, because too much inventory built up last year when demand evaporated. In its most recent quarter, Qualcomm’s mobile chip sales fell a whopping 17% year over year. In comparison, research firm Canalys estimates that global phone sales also fell year-on-year, but by an 11% smaller rate.

However, with inventories now at a more normal level, any surge in hardware purchases could trigger a strong rebound — or at least, that’s what Wolfe did. Analysts at Canalys also believe a recovery is imminent, after six consecutive quarters of annual declines in global smartphone shipments.

Chip companies can see very volatile results, as their sales depend not only on end-market consumption of phones, computers, servers, and other hardware, but also on what device makers choose to do with the inventory. When the market goes down, sellers sell less and stop buying inventory. On the other hand, when markets are growing and optimistic, sales are growing and device makers are looking to acquire more inventory to take advantage of expected demand. Therefore, chip makers could see a greater variance in results.

So those who have been stymied by Qualcomm’s double-digit revenue decline in recent quarters are likely on their way to a nice recovery in the coming quarters.

What now

While many agree that the market for consumer electronics, including mobile phones, may be bottoming out, the speed and inclination of recovery remains largely unclear.

In recent days, Qualcomm’s main foundry for its high-end chips has been Taiwanese semiconductor industryin fact, gave somewhat cautious guidance for the rest of 2023, downgrading its forecast for foundry growth while noting a weak China recovery and continued caution on the part of OEM vendors regarding inventory building.

So while Qualcomm may see its mobile chip sales decline, its growth may falter from here until inflation drops and fears of a global recession pass. However, Qualcomm has an inconsistent valuation, and should remain a safe and cheap stock for earnings growth for the foreseeable future.

Billy Dubrestin holds positions in the Taiwanese semiconductor industry. Its clients may own shares in the aforementioned companies. The Motley Fool has positions with Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

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