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.

Is Apple (AAPL) Stock Facing Major Trouble Soon?

The rapid advancement of groundbreaking technologies and a significant surge in digital development have considerably heightened the attraction towards tailored hardware solutions. Yet, not all technology hardware enterprises are reaping the benefits.

Tech titan Apple, Inc. (AAPL), renowned for its history of transforming product sectors, including personal computers, smartphones, and tablets, has added another feather to its cap by being the first-ever company to surpass a $3 trillion market capitalization as of last month.

Despite being a leading consumer electronics brand consistently offering returns to its investors, AAPL has recently navigated through a volatile phase. Last month’s uninspiring earnings report led to a 2% dip in its stock prices, which now trade below the crucial 50-day moving average of $185.06, dampening investor sentiment.

Undoubtedly, several corporations and their affiliates are making strides toward significant transformations with Generative artificial intelligence (AI). However, to expand the innovative capacities of these technologies beyond the existing hype, it is paramount to impact consumers' lives in integrated ways that extend beyond launching an array of game-changing announcements.

In contrast to other firms seeking notable AI revolutions, AAPL is leveraging this cutting-edge technology to augment fundamental features in its latest devices.

The tech giant recently unveiled a new range of iPhones and a watch equipped with enhanced semiconductor designs powering fresh AI capabilities. Most significantly, these enhancements target primary operations such as managing calls or capturing superior photographs.

The tech giant has announced its pioneering entry into the AR/VR market with the Apple Vision headset, signaling the beginning of a new chapter in its success narrative. Slated for release early next year, this product will retail at $3,499.

AAPL has a commendable record of executing enormous share repurchase plans in the last decade, having invested over $573 billion in buybacks since 2012. Despite witnessing a third consecutive quarter of dwindling revenues, the company shelled out an additional $18 billion for buybacks in the most recent quarter.

However, despite such positive strides, AAPL is anticipated to encounter significant obstacles soon. Let’s delve deeper and examine the factors that could contribute to such a scenario.

Mixed Financials

Tarnishing AAPL’s image is its disappointing financial results of the fiscal third quarter, which ended July 1, 2023. Total net sales dropped by 1.4% year-over-year to $81.80 billion, largely due to a 4.4% year-over-year decline in product revenue to $60.58 billion.

iPhone sales, which traditionally account for nearly 50% of the company's total income, suffered a 2.4% setback from last year, dropping to $39.67 billion. Mac and iPad sales also fell 7.3% and 19.8% from the prior-year quarter to $6.84 billion and $5.79 billion, respectively.

On the contrary, the company's services segment boasted an 8.2% year-over-year increase, fetching $21.21 billion, contributing to the company's third-quarter profit. However, the weaker-than-anticipated iPhone sales disappointed investors.

Stretched Valuation

AAPL trades at a considerably premium valuation compared to its competitors, evident from its forward non-GAAP P/E and EV/Sales of 28.73x and 6.96x, which are 28.9% and 156.5% higher than the industry averages of 22.29x and 2.71x, respectively. AAPL’s forward EV/EBITDA multiple of 21.26 is 47.7% higher than the 14.39 industry average.

AAPL’s Recent Developments and Their Implications

Reinvestment of Funds

Despite the advent of a VR headset and the possibility of an autonomous car, the iPhone remains AAPL’s primary product and chief revenue generator. In 2022, global smartphone shipments reached a staggering 1.23 billion units, whereas the number of AR and VR devices shipped worldwide reached just 9.11 million units – a scale difference of 135 times.

In June, AAPL introduced its first major product since 2014, the Vision Pro, an AR headset priced at $3,499. Despite signaling an expansion into new tech landscapes for the company, industry analysts predict that this new offering is unlikely to impact its revenue needle for several years. It is expected to generate annual revenue of over $20 billion by 2037 – more than a decade away.

Meanwhile, the company has spent tens of billions of dollars developing this product. Some analysts believe that Vision Pro production and shipments are expected to be “quite small” for 2024, having negligible benefits for AAPL stock price.

If the company had halved its share repurchases over the past decade, it would have had an additional $250 billion in investment capital, potentially leading to an even superior product at this stage.

iPhone Ban

China has proven instrumental to AAPL's growth and expansion. Over 95% of AAPL's globally acclaimed products – iPhones, AirPods, Macs, and iPads - are manufactured in China. AAPL’s CEO, Tim Cook, cited China's proficient skill sets as a compelling reason for this reliance on Chinese manufacturing.

In the fiscal year 2022, revenues generated from China reached $74 billion, accounting for roughly 19% of AAPL's total earnings. Greater China segment sales accounted for 20% of AAPL’s third quarter sales in 2023, and its Greater China sales rose 7.9% year-over-year to $15.76 billion.

However, the growing geo-political tension between the United States and China represents potential challenges for AAPL. The Chinese government recently banned using iPhones in workspaces, citing security issues, marking a new chapter in the ongoing trade and technology conflict between the world's two biggest economies.

Nikkei reported that some state-owned entities have prohibited employees from bringing any AAPL devices into their work premises, particularly those with access to trade secrets. Consequently, this move, seen as minimizing security risks tied to AAPL's gadgets, caused AAPL's market capitalization to shrink by over $200 billion within the last week.

In terms of iPhone shipments, China surpassed the U.S. as the largest single market in the second quarter of 2023. This trend persisted in the third quarter with a noteworthy surge in iPhone net sales in Greater China.

Some predict that the government restrictions may not significantly impede AAPL's sales but could signify forthcoming issues for the company in China, which ranks as the world's second-largest economy. The uncertainties surrounding AAPL’s future manufacturing and sales in China have sent its stocks spiraling downwards.

The recent launch of the iPhone 15 series has garnered mixed reviews among Chinese consumers. Some critics have highlighted the lack of groundbreaking new features and unfavorably juxtaposed the latest iPhones with Huawei’s 5G Mate 60 Pro and Mate 60 Pro+ models, which feature advanced Chinese-manufactured processors.

Despite the perceived lack of hardware upgrades, AAPL continues to deliver an unmatched user experience that makes transitioning to Android devices less appealing for users. Experts remain confident regarding AAPL’s dominance in the over-$800 smartphone segment. Although Huawei's re-entry into the 5G phone market may imply some level of competition, the company's ongoing supply chain problems could limit its overall sales appeal.

M&A Activity Could Escalate AAPL’s Innovations

Rising interest rates yield gains for cash-loaded enterprises such as AAPL. However, they pose significant challenges for burgeoning technology firms that hinge on financing for their growth and prosperity.

One critique leveled at AAPL is the waning innovation. Excluding advancements in camera technology, AAPL's lineup has been lacking groundbreaking technological leaps in recent years.

The current monetary policy landscape could induce a spike in mergers and acquisitions within the tech arena. AAPL's substantial cash reserves render it a probable suitor for tech firms, potentially fueling its growth and innovation via successful, value-adding acquisitions.

Lack of Strategy for Generative AI

Data in today’s world has emerged as a vital asset, and Generative AI is leveraging it to drive unprecedented innovations. The rise of Gen AI could mark a seismic shift in the industry, potentially transforming market dynamics by allowing for novel product creation and cost reductions. AAPL could face formidable challenges as the tide turns toward this new technology.

AAPL's vulnerable position can be attributed to its need for a robust strategy centered around GenAI and Large Language Models (LLMs). LLMs drive services like ChatGPT; without incorporating them, AAPL's leadership in the tech space may be threatened.

As AI continues to burgeon, AAPL risks being surpassed by three powerhouse players—Microsoft Corporation, Alphabet Inc., and Inc.—all of which boast more established footholds in the rapidly expanding AI sphere.

The delay in AAPL's development of a computing platform implementing cloud-based LLMs has resulted in the company trailing slightly behind its competitors. The challenge of catching up is compounded by customers' hesitancy to change providers due to the necessity of reprogramming their existing models.

Meanwhile, relentless competitiveness marks the landscape as companies like Amazon and Microsoft persist in unveiling new AI solutions. These advancements are anticipated to strengthen their AI division’s revenue, reinforcing their position and assertiveness within AI development.

Mixed Outlook

As the company looks toward the fourth quarter, it anticipates a deceleration in total revenue, with both Mac and iPad projections showing double-digit declines.

For the fiscal year ending September 2023, Analysts expect AAPL’s revenue and EPS to decline 2.8% and 0.8% year-over-year to $383.33 billion and $6.06, respectively.

However, for the first quarter ending December 2023, its revenue and EPS are expected to increase 5.3% and 11.6% year-over-year to $123.31 billion and $2.10, respectively. The company surpassed consensus EPS estimates in three of the trailing four quarters.

Wall Street analysts expect the stock to reach $207.39 in the upcoming 12 months, indicating a potential upside of 18%. The price target ranges from a low of $167 to a high of $240.

Bottom Line

Despite AAPL stock dipping 2.1% over the past month, its year-to-date gain holds steady at an impressive 35.3%, closing its last session at $175.74.

The tech behemoth securely holds its footing within China's high-end smartphone market. However, it is anticipated to experience growing competition from domestic brands such as Huawei, which continues to enhance offerings with progressive upgrades. Additionally, lackluster initial iPhone 15 sales could present a challenge for the company.

AAPL remains profitable, although the emerging GenAI might cast a shadow over the tech deity. Fresh industry players could leverage LLMs, thereby revolutionizing the entire sector.

Moreover, given the strained relations between the United States and China, vital to AAPL’s manufacturing and market strategies, and AAPL’s potentially stretched valuation, investors should wait for a better entry point.

Sector Analysis Can Help Your Trading

Today, I'm going to be looking at nine individual sectors and analyzing each one. I am going show you a quick and easy way to tell which sectors are trending and which ones are stuck in a trading range.

I will also be looking at the top three stocks in each of those sectors that are trending to the upside.

The sectors I will be analyzing are as follows: Continue reading "Sector Analysis Can Help Your Trading"

Apple is teed up for next week

Yesterday, I went to the Apple(NASDAQ:AAPL) store to ask them about the new iPhone 5S and to see if they had any in stock. I was told that they no longer sold the iPhone in the store and that I had to order one online. I was somewhat taken aback by this, but then it all sort of made sense to me when I thought about it.

I think the demand for the iPhone 5S, the gold edition in particular, has been off the charts and I think we're going to see a tremendous number of iPhone sales in the fourth quarter. Having checked out the Apple store, I decided to go to Best Buy to see what they had in the iPhone 5S market. It was pretty much the same story, you have to order online and you can pick it up at the store. This makes a lot of sense because Apple can then deliver what people want based on their online orders. This allows Apple to ramp up its production to meet demand.

Technical Analysis of Apple , using Trade Triangles, Fibonacci and classic technical analysis.

1) Double Bottom
2) Pivot Point
3) Target Zone from Pivot Point
4-5) Measurement for Fibonacci Retracement
6) 50% Fibonacci Retracement
7) Line In The Sand - $497
8) Trade Triangles

The market action recently for Apple (NASDAQ:AAPL) has been choppy, which I believe is a good thing, as Apple sets itself up to move higher. I have been looking for Apple to move to the $550-$560 area or higher. That target zone is still in effect. The battle lines are drawn and I know that if the market does not rally strongly today, the new trigger point for Apple next week is going to be the $497 level. Once over that level, this market could take off and move very quickly to higher levels.

Leave a comment • Get Involved • Ask a question • Your Opinion Counts

Doubtless, you may have heard some of the problems that have been circulating in the press about the new iPad retina displays, and that they're going to be delayed coming to market. This is likely just a technical glitch that could have been caused by one supplier. I think that demand for the smaller 7in retina iPad is going to be very big both here and overseas.

Lastly, like thousands of loyal Apple fans, I still don't have an iPhone 5S Gold, but I want one. I guess I'm going to have to break down and order online and wait for it to be delivered to the local Apple store. One thing I am really enjoying a great deal is the new iOS7 operating system. Apple has done a masterful job of changing its old and aging operating system into one that really is cutting-edge. The fact that it can run on the new 64-bit A7 chip and the old 32-bit chip is a testimonial to Apple's technical expertise.

As you can see on the chart, I have drawn a line in the sand for Apple and when this line is crossed it will turn our intermediate weekly Trade Triangle green, indicating a resumption of Apple's strong and longer-term uptrend.

If you have any comments or thoughts on Apple, I would love to hear from you!

Have a great weekend everyone and let's watch Apple closely next week, it could be a good one.

All the best,

Adam Hewison
Co-Creator, MarketClub

3 Big Surprises I Experienced At My Local Apple Store This Weekend

Before I share with you my 3 surprises, Apple (NASDAQ:AAPL) is set to announce on today how many iPhones it sold over this past weekend.

apple logoI think they sold a lot of their new iPhones, maybe more than 5 million (announced today - 9 million sold) . That's the number Apple sold at their last iPhone roll-out weekend. I think Apple is going to sell a lot more, maybe 10 or 20 percent more.

Here's the reason why I say that.

I'm was just wrapping up some time at my summer home, here in Maine, and I decided on the spur of the moment to check out the local AT&T store and find out more about the new iPhone 5S, which I wanted to see first hand. Continue reading "3 Big Surprises I Experienced At My Local Apple Store This Weekend"