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HomeMarketApple Is 1 Reason Qualcomm Will Keep Underperforming, Analyst Says

Apple Is 1 Reason Qualcomm Will Keep Underperforming, Analyst Says

Qualcomm generated $1.37 billion in revenue from its auto segment in fiscal 2022. Here, CEO Cristiano Amon speaks during the company’s press event for CES 2022.

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Ethan Miller/Getty Images

Qualcomm
is trying to diversify, but a Wells Fargo analyst doesn’t view the move as a game-changer for the stock.

On Monday, analyst Gary Mobley downgraded his rating on
Qualcomm
‘s stock (ticker: QCOM) to Underweight or a Sell comparable rating from Equal Weight or Hold equivalent. His price target of $105 remains unchanged.

Shares were trading largely flat on Monday, at $118.81. They have fallen 35% this year.

Semiconductor makers have been hit hard this year as the fastest inflation in 40 years has crimped demand for chips in everything from home computers to smartphones. The iShares Semiconductor exchange-traded fund (SOXX), which tracks the performance of the largest semiconductor companies, is down 33% this year. Analysts such as Deutsche Bank’s Sidney Ho see the pain continuing.

But when investor sentiment turns positive on chip stocks, Mobley said “Qualcomm shares will continue to trade at a discount to peers.”

For one, the analyst cites
Apple
‘s (AAPL) move to create its own internal modem for the iPhone 16. Apple in 2019 bought Intel‘s (INTC) smartphone-modem business to phase out its reliance on Qualcomm.

In a call discussing fourth-quarter earnings, Qualcomm finance chief Akash Palkhiwala said he expects “minimal contribution from Apple product revenue in fiscal 2025,” which starts in October 2024.

Presumably, to offset the future loss, Qualcomm has doubled down its push into the automotive space. Qualcomm generated $1.37 billion in revenue from its auto segment in fiscal 2022, a 41% jump from last fiscal year. Palkhiwala said in a conference call this month he believes “the technologies we have in phones [have] become extremely relevant to the auto industry.”

Mobley acknowledges auto is becoming a larger component to revenue but he expects approximately two-thirds of total fiscal 2025 revenue to be directly linked to the smartphone market. The auto segment is “simply not large
enough to move the needle for Qualcomm,” he reasoned, highlighting the segment made up just 3% of total revenues in fiscal 2022.

The company forecasts the automotive segment to generate $4 billion in revenue in fiscal 2026. That “still will represent a relatively small percentage of Qualcomm’s business,” Mobley said.

Qualcomm didn’t immediately respond to a request for comment.

The idea that its future success will largely continue to be linked to smartphones is a worrisome sign, according to the analyst.

“The rapid decline in demand for smartphones paired with the easing of supply constraints has caused elevated inventory levels in handset [and] we believe investors will continue to factor in a discount to smartphone-exposed names,” Mobley said.  

Credit Suisse
and KeyBanc Capital Markets analysts have a divergent view, rating the stock bullishly.

Credit Suisse named Qualcomm as its top pick in November, citing its trading level of 13.5 times the firm’s projected 2023 earnings, which is relatively inexpensive versus other companies in the sector, the analysts said.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

Credit: marketwatch.com

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