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Should Investors Buy Qualcomm (QCOM) Stock After Its Recent Pullback?

Qualcomm Stock Drops As Chipmaker Posts Mixed Quarterly Results

Qualcomm (NASDAQ: QCOM) has long commanded a strong position among semiconductor stocks. The company reported its first-quarter earnings after the bell Wednesday. Investors seemed to be not too pleased by the earnings report during the after-hours. The shortage of semiconductors around the world and the revenue miss may be enough to send the stock sliding. The downward pressure came despite its strong projections of between $7.2 billion and $8 billion in sales in the current quarter. That’s a stronger estimate than analysts are expecting. The company’s sales forecast for its patent licensing division, however, came in at a midpoint of $1.35 billion. That’s lower than consensus estimates for $1.43 billion.

We delivered an exceptional quarter, more than doubling earnings year-over-year due to strong 5G demand in handsets and growth in our RF front-end, automotive, and IoT adjacencies, which drove record earnings in our chip business,” said CEO Steve Mollenkopf. “We remain well-positioned as the 5G ramp continues and we extend our core technology roadmap to adjacent industries.

In Wednesday’s earnings release, Qualcomm said that chip sales increased strongly. Revenue for handset chips saw a jump of 79% year-over-year to $4.22 billion in the quarter. Meanwhile, RF front-end chips which are used for 5G besides Qualcomm’s modems rose by 157% from a year ago.

Both revenue and earnings came in strong as Qualcomm’s business was propelled by smartphones adopting 5G as well as the electronics boom during the pandemic. Recall that during the onset of the coronavirus pandemic, chip orders initially collapsed and that undoubtedly put a dent in QCOM stock price. However, as remote work and studying became the new normal, the demand for chips increased dramatically.

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Demand Outstrips Supplies May Not Exactly Bad In The Long Run

Yes, I get those chip shortages will lead to lower sales for the company. But here’s how I see it. If semiconductor shortage is the company’s biggest problem, then it is not too big of a problem to have. Right now, it’s a systemic problem as the shortages are across the board. There’s no question that the accelerated digitization during the pandemic is driving demand for semiconductors in the entire industry. While the current shortages may not exactly be good news for the company, the problem will be minimized when companies such as Taiwan Semiconductor Manufacturing Co. (NYSE: TSM) and Samsung Electronics (OTCMKTS: SSNLF) ramp up their production. Eventually, all of the benefits of 5G chipset growth will accrue to Qualcomm.

Source: TD Ameritrade TOS

Now with the change in the market, we have kind of 16% of the market that was not available to us before being available. So as we kind of look further out, we see this as a pretty material expansion of (addressable market) for us,” Chief Financial Officer Akash Palkhiwala

The Demand For 5G Chipsets Is Only Going To Get Higher Over Time

Qualcomm is banking on the 5G technology as a potential catalyst for its business. While 5G could take a few years to fully take off, Qualcomm already has 110 5G agreements with smartphone makers. It covers all of the major handset manufacturers for its 5G licensing. It is not difficult to see why Qualcomm has so many agreements under its belt.

After all, chances are the 4G smartphone that you are using also has a Qualcomm chipset in it. This is not surprising as the biggest phone manufacturers like Apple (NASDAQ: AAPL) and Samsung are selling 5G smartphones and are relying on Qualcomm for its chipsets. As time goes by, it’s safe to say that almost every smartphone user will probably want to upgrade to this technology at some point. If it weren’t because of the shortages, 2021 could be a defining year for QCOM stock investors.

Notably, our strong performance and our outlook would have been even stronger had we not been supply-constrained,” Qualcomm Chief Executive Steve Mollenkopf said on the analyst call.

The company has a stake in many other industries aside from the mobile industry. It specializes in 5G infrastructure and connectivity, artificial intelligence, virtual reality (VR), automotive, consumer electronics, and networking. You could say that Qualcomm is a company that improves the quality of life via many industries. For instance, General Motors (NYSE: GM) reported that it has to trim its productions at several factories due to chip shortages as well. Now, Qualcomm may not be manufacturing the chips for these automotive plants. But it does certainly utilize the services of some of the same chip contract manufacturers.

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Qualcomm’s Acquisition Of NUVIA Presents Big Opportunity

Last month, Qualcomm announced that it will acquire NUVIA. Here’s why it’s a huge move. The acquisition allows NUVIA’s highly anticipated CPU designs in existing lines. It also puts them into the data center CPU game. NUVIA CPUs could become part of Qualcomm’s broad portfolio of products, powering smartphones, laptops, and digital cockpits, among others.

Compute performance, connectivity and power efficiency are critical ingredients that make the billions of Android and Chrome OS devices shine,” said Hiroshi Lockheimer, SVP Platforms & Ecosystems, Google. “The addition of NUVIA extends Qualcomm’s capabilities in these three areas and we’re excited to see the next generation of Snapdragon with NUVIA.

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Bottom Line

Qualcomm’s chips are becoming more profitable and are now a bigger part of its business. However, the supplies constraint issue will need to be solved before we could see another breakout in its stock price. Now, as QCOM stock retreats over the concerns of supplies constraint, would this provide a nice setup for investors to buy on dips? If you believe that all the 5G benefits will eventually accrue to Qualcomm, then by all means take a chance when the stock is taking a breather.

If you are a long-term investor, QCOM stock may indeed have a long growth runway ahead. Chances are, it will grow into its valuation. Apple’s 5G iPhone has propelled Qualcomm’s chipset sales dramatically. Can you imagine what will happen when every smartphone incorporates 5G technology? You will have to add QCOM stock to your watchlist to find out.

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