Down 37% in this bear market, can Qualcomm recover in 2023?


what happened

share of Qualcomm (QCOM 1.27%) down from 37.2% S&P 500 According to the data, the index peaked on January 3, 2022 S&P Global Market Intelligence. The semiconductor giant’s downward trend has been pretty relentless, as the stock price has fallen in nine of the last 12 months.

With steady growth across the board and strong earnings reports throughout the year, Qualcomm didn’t inspire this dramatic decline on its own. Instead, investors included this stock in the “high-risk growth stock” category as they responded to macroeconomic challenges in 2022.

so what

You know the story of inflation worries in the stock market last year, and how the inflation-fighting rate of the federal interest rate drove stocks lower. Long-term medication can sometimes cause worse harm than short-term illness. Together, these market-cutting economic trends weighed heavily on high-octane growth stocks with high risk of ownership.

It certainly makes sense on a higher level. High inflation puts less money in consumers’ pockets, which then leads to lower consumption. At the same time, higher prices for everything from fuel and transportation to staffing and raw materials will increase the cost of doing business.

That’s bad news for bottom-line profits and cash flow generation. And then, if economic stress leads to a cash crunch, higher interest rates will increase debt and make it harder to keep the lights on.

Furthermore, investors and financial analysts often use the discounted cash flow model to determine the fair value of stocks. In that calculation, the long-term return on an investment is reduced by the risk-free discount rate, which should increase when government-backed bonds come with higher interest rates. This shift makes growth stocks look like terrible investments over the long term, because of the higher risk-free return and lower time value of those hard-earned revenue dollars.

So how does that combo of market risks relate to Qualcomm?

As part of the tech sector in general and the semiconductor industry in particular, Qualcomm is often characterized as a high-risk investment. Stocks in this category tend to be volatile, rising or falling compared to the broader stock market. The company backed up that outlook with 32% year-over-year revenue growth in fiscal 2022, which ended on September 25. So far, the high-risk designation makes sense.

However, Qualcomm is not some hot-shot growth phenomenon with negative earnings, limited cash, and a crushing debt burden. These cumulative sales add up to $44.2 billion in 2022, underpinning net profit of $12.9 billion and operating cash flow of $9.1 billion. With this strong cash flow and $6.4 billion in cash reserves and short-term investments, Qualcomm isn’t likely to need more debt anytime soon (unless it wants to try a capital-intensive idea like acquiring a larger company).

So when you dig beneath the surface, Qualcomm really shouldn’t be stuck with the risky market darlings of the past. It’s a mature business on a rock-solid financial platform, still delivering 22% sales growth during a bear market.

what now

That tried-and-true discounted cash flow calculation shows that Qualcomm is trading at a decent price today, if you assume zero bottom-line growth over the next five years and forever with a 10% discount rate. If you lift the discount rate to 14% to match a 4% increase in federal interest rates in 2022, Qualcomm would need to grow earnings by 8% per year over the next five years to support its current stock price. So the stock looks reasonably priced if you expect Qualcomm to deliver a modest rate of near-term earnings growth.

A quick examination of Qualcomm’s historical price-to-free cash flow ratio also supports this analysis, as the current valuation is very close to Qualcomm’s average ratio over the past three, five or 10 years:

QCOM price from free cash flow chart

QCOM Value to Free Cash Flow data by YCharts

In other words, Qualcomm could be due for a price correction in 2022. Right now, you should consider your company’s business plan and financial reports to determine whether you should buy, sell, or hold this stock. The macroeconomic market apparatus seems to have already played its part.

From that perspective, you might want to pick up some reasonably priced Qualcomm shares today. The company is a leader in 5G wireless networking technology, already working on the future of 6G networks and bringing satellite-based phone networks to the mainstream market. Smartphone sales may have slowed in recent years, but Qualcomm continues to find ways to keep its phone-related revenue streams flowing anyway.


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