Should QUALCOMM (QCOM) Downsizing Be a Warning Sign to Investors?

The extensive chip utilization in diverse industries and the rising inclination toward innovative technologies are projected to propel semiconductor demand. The industry is further bolstered by enticing governmental incentives and investments.

QUALCOMM Incorporated (QCOM), with a market cap of $123.06 billion, specializes in wireless technology development, licensing, and smartphone chip design. The company's key patents pertain to CDMA and OFDMA technologies, pillars of all 3G, 4G, and 5G networks. As the world's principal vendor of wireless chips, it provides top-tier handset manufacturers with cutting-edge processors.

Despite its position, recent news of impending layoffs has raised some concerns. The company predominantly plans staff reductions and other resizing endeavors for the fourth quarter of the fiscal year, which is expected to be completed in the first half of 2024.

QCOM, having a presence in over 12 Chinese cities primarily for its semiconductor and mobile telecommunications businesses, reiterates its steadfast commitment to spearheading advanced technology development within the country. Furthermore, it ensures a supportive transition for its employees affected by restructuring, providing them with substantial redundancy packages.

QCOM's staff reduction strategy in China and Taiwan forms a part of its broader restructuring initiative, intended to navigate through the dwindling consumer demand for smartphones and other gadgets equipped with its technology.

According to Canalys’ figures, the global smartphone market suffered a sixth straight quarterly decline for June 2023. Despite a cautious optimism for potential market recovery, QCOM is feeling the impact of this downturn. This contraction, intensified by escalating competition from Chinese chipmakers, took a toll on the company’s revenue and profit margins in the last quarter.

The layoff news timing coincides with the ongoing trade tensions between the U.S. and China and Beijing's imposition of a partial ban on using iPhones by government personnel. This situation creates additional strain, as QCOM is a significant supplier to Apple, Inc (AAPL). However, the successful introduction of the iPhone 15 in mainland China might help mitigate some of these ordeals.

Moreover, China’s overarching smartphone market is contending with challenges, too. Sales declined by 4% during the second quarter of 2023, marking a record low for second-quarter sales since 2014, as per the market research firm Counterpoint.

Furthermore, QCOM cautioned that the cost-cutting measures will result in restructuring charges, a significant portion of which will be accounted for in its fourth-quarter report. QCOM projects its August sales to range between $8.1 billion and $8.9 billion, a dip from $11.4 billion in the year-ago quarter, while EPS is anticipated to decline between $1.37 and $1.57 from $2.54 during the prior-year quarter. This represents a notable setback for the organization.

Potential Implications of the Impending Layoffs

On the positive side, these drastic steps may enable the company to curtail its operating costs, enhancing profitability and cash flow. This could augment the firm's earnings per share and future dividend payouts. It may also steer QCOM toward concentrating on its principal business and strategic growth areas like 5G technology, automobiles, and the IoT.

Conversely, there may be negative repercussions. These layoffs could tarnish QCOM’s reputation and affect employee morale and customer trust. It may also decelerate the firm's research and development activities, consequently diminishing the potential for innovation in the long run. The company could find itself vulnerable, exposed to legal complications and heightened regulatory scrutiny, particularly in China, where it grapples with anti-trust investigations and patent disputes.

Therefore, the repercussions of these layoffs on shareholders will likely hinge on QCOM's capability to efficiently carry out its restructuring plan and adapt to shifting market conditions. The company's stock prices have been volatile after the layoff announcement, signifying a wave of uncertainty and investors' ambivalent responses.

Nevertheless, within this challenging scenario, it is also crucial to point out a few potential areas of optimism. Here are some additional factors that could potentially influence the QCOM’s course in the upcoming months:

Recent Developments

On September 11, QCOM confirmed a strategic alliance with Apple Inc. (AAPL) to supply its Snapdragon 5G Modem-RF Systems for upcoming smartphone iterations set to launch in 2024, 2025, and 2026. The partnership reaffirms QCOM’s sturdy standing within the industry.

Moreover, on August 4, QCOM joined forces with Robert Bosch GmbH, Infineon Technologies AG, Nordic Semiconductor, and NXP Semiconductors to financially back a German-based company specifically committed to bolstering global adoption of RISC-V.

The joint venture aims to accelerate the development and market introduction of products rooted in RISC-V technology across diverse industries. The widespread acceptance of the RISC-V technology envisages fostering more diversity within the electronic field - diminishing entry obstacles for nascent and smaller enterprises while facilitating greater scalability for well-established firms.

Robust Financials

For the fiscal third quarter ended June 25, 2023, QCOM’s total revenues came in at $8.45 billion, while its Earnings Before Taxes (EBT) stood at $1.76 billion. Its net income and earnings per share stood at $1.80 billion and $1.60, respectively.

For the same quarter, QCOM’s net cash provided by investing activities amounted to $1.74 billion, compared to net cash used by investing activities of $4.88 billion. Moreover, total cash and cash equivalents at the end of the quarter stood at $6.18 billion, up 93.2% year-over-year.

Furthermore, as of June 25, 2023, QCOM’s total current liabilities amounted to $8.46 billion, compared to $11.87 billion as of September 25, 2022.

Attractive Valuation

In terms of forward non-GAAP P/E, QCOM’s 13.23x is 37.8% lower than the 21.28x industry average. Likewise, its forward EV/EBITDA multiple of 9.84 is 28% lower than the industry average of 13.66. Its 11.33x forward EV/EBIT is 36% lower than the 17.71x industry average.

Robust Growth

QCOM’s revenue grew at CAGRs of 24.5% and 11.2% over the past three and five years, respectively. In addition, its levered free cash flow grew at 43.9% and 9.9% CAGRs over the past three and five years, respectively.

High Profitability

QCOM’s trailing-12-month EBITDA and EBIT margin of 34.28% and 29.51% are 274.5% and 553.9% higher than the 9.15% and 4.51% industry averages, respectively. Moreover, its trailing-12-month cash from operations of $8.65 billion is significantly higher than the industry average of $60.08 million.

Growing Institutional Ownership

QCOM’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their QCOM stock holdings.

Institutions hold roughly 73% of QCOM shares. Of the 2,508 institutional holders, 1,111 have increased their positions in the stock. Moreover, 142 institutions have taken new positions (7,940,217 shares).

Price Performance

Even though QCOM’s shares have plunged marginally year-to-date to close the last trading session at $109.19, over the past five days, the stock gained 1.2%.

Wall Street analysts expect the stock to reach $136.30 in the next 12 months, indicating a potential upside of 24.8%. The price target ranges from a low of $100 to a high of $150.

Favorable Analyst Estimates

For the fiscal fourth quarter ending September 2023, analysts expect QCOM revenue and EPS to come at $8.51 billion and $1.90, respectively. Moreover, for the fiscal year ending September 2024, analysts expect QCOM revenue and EPS to surge 5.6% and 10.9% year-over-year to $37.67 billion and $9.19, respectively.

Bottom Line

Despite experiencing a deceleration during the latter half of the preceding year, the semiconductor industry hit an unprecedented milestone in annual sales with a growth of 3.3% year-on-year. While there are hurdles ahead, expert views remain largely optimistic considering the industry’s pervasive applications expansion.

In addition to industry tailwinds, QCOM finds itself poised in an enviable financial space. Optimistic analyst forecasts, compelling valuation metrics, steadfast profitability, and distinctive growth prospects augment this fortitude.

Further solidifying this perspective is QCOM's unwavering commitment to its investors, substantiated by its uninterrupted history of dividend payouts over the past 19 years. It pays a $3.20 per share dividend annually, translating to a 2.92% yield on the current share price. Its four-year average dividend yield is 2.31%. The company’s dividend payouts have grown at a CAGR of 6.9% over the past three years and 5.4% over the past five years.

However, potentially casting a shadow over these optimistic forecasts are QCOM’s planned layoffs, which could influence the company’s performance and stock prices. But the impact largely hinges on its historical performance and future earnings estimates.