Investors who want to profit from the growing adoption of AI smartphones should consider buying this chip stock while it’s still cheap.
Qualcomm (QCOM 2.66%) shares are down 20% from their 52-week high hit on June 18, but are still up a healthy 20%+ year to date.
But there’s a good chance this semiconductor stock will pull itself out of this slump when it reports its third-quarter fiscal 2024 earnings on July 31. Let’s take a look at why that might be.
Improving smartphone demand could help Qualcomm beat expectations
On May 1, Qualcomm announced its second quarter financial results for fiscal 2024 (the three months ending March 24). The company’s sales were $9.4 billion, flat compared to the previous year. Mobile phone business revenue was also flat compared to the previous year at $6.2 billion. This means that Qualcomm derives almost two-thirds of its revenue from the sale of smartphone chips, and the company’s fate is tied to the health of this market.
The smartphone market had a disappointing last year, with shipments falling 3% due to weak demand, according to market research firm IDC, but 2024 is shaping up to be a strong year: Smartphone sales grew 7.8% in the first quarter and 6.5% in the second quarter.
IDC notes that smartphones with generative artificial intelligence (AI) capabilities are growing faster than expected, predicting shipments will reach 234 million units in 2024. Still, with the market expected to account for 19% of the total market this year, there’s plenty of room for AI smartphones to grow.
The faster-than-expected growth in AI smartphone adoption should ideally be a tailwind for Qualcomm, which is set to account for 23% of the smartphone processor market at the end of 2023. More importantly, Qualcomm’s management noted during its earnings call in May that China is seeing strong adoption of AI smartphones, driven by gains in premium devices from manufacturers such as Xiaomi, OnePlus, Vivo and Huawei.
It’s worth noting that Xiaomi and Vivo saw strong shipment growth last quarter, with Vivo’s smartphone shipments growing 22% year-over-year and Xiaomi’s growing 27% year-over-year. The strong increases in shipments from these Chinese manufacturers bodes well for Qualcomm, which has been supplying the company with AI-focused smartphone chips.
When the company last reported earnings, it expected third-quarter revenue of $9.2 billion, up 9% from a year ago. Analysts expect Qualcomm to post earnings of $2.25 per share on revenue of $9.21 billion, in line with the company’s expectations. But strong growth in AI smartphone shipments last quarter could help Qualcomm beat Wall Street expectations.
More importantly, the rapid adoption of AI smartphones will enable Qualcomm to maintain a faster growth pace in the long term.
The overall picture seems bright
IDC had previously predicted 170 million AI smartphones would be shipped this year, but the company has since significantly increased its outlook, suggesting that consumers are becoming more accustomed to the technology than expected.
Shipments of generative AI-enabled smartphones could grow from an estimated 234 million units in 2024 to 912 million units in 2028. This represents a staggering compound annual growth rate of 78% based on 2023 shipments of 51 million units.
Such growth in the AI smartphone market is expected to better than expected Qualcomm’s earnings forecast when it is released next week, so the semiconductor stock is likely to resume its upward trajectory in 2024.
That’s why now is a good time to buy Qualcomm stock. The company’s shares are trading at 26 times its earnings over the past year, a discount to the Nasdaq 100 Index’s 32 times earnings (a benchmark for tech stocks). You might not be able to buy at such an attractive valuation for much longer.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool invests in and recommends Qualcomm. The Motley Fool has a disclosure policy.
