Qualcomm Warning: QCOM Stock Is Cheap for Good Reason

Qualcomm (NASDAQ:QCOM) may not have too many fans among growth investors, but a growing number of value investors are becoming bullish on QCOM stock.

This maker of semiconductors used in mobile phones and internet of things devices is starting to be considered a possible way to play the rising integration of AI technology into a myriad of applications.

With this possible growth catalyst, combined with the stock’s low valuation (13.1 times earnings), value-minded investors may see the potential for outsized returns, if AI leads Qualcomm back on the path to growth, and leads to an increase in QCOM’s earnings multiple.

My view? Whether you are a growth or value investor, it’s still best to take a pass on this stock. Shares are low-priced for a reason, and the company’s potential to capitalize on AI remains up for debate.

QCOM Stock: Cheap for a Good Reason

Compare Qualcomm’s valuation to that of other high-profile chip makers, and you’ll see that many of QCOM’s peers trade at far higher price-to-earnings multiples. However, this is not a mistake on the market’s part.

For one, QCOM stock has a low valuation, due to the high uncertainty surrounding future results. The softening of demand for mobile devices and other electronics has had a serious impact on Qualcomm’s fiscal results in recent quarters.

On a year-over-year basis, revenue has declined by double-digits, and earnings per share have fallen off a cliff. If that’s not bad enough, weak demand is poised to persist.

Namely, because of a lack of evidence that smartphone sales demand is on the verge of bouncing back in China. This discouraging guidance calls into question whether the company can even beat the market’s already-low expectations for earnings this fiscal year (ending September 2023).

Much less, whether Qualcomm can experience a forecasted earnings rebound next fiscal year.

That’s not all. Even if demand normalizes in FY2024, keep in mind other headwinds. For instance, like I recently argued, rising China-U.S. geopolitical tensions. Another one to consider is the forthcoming loss of a large customer.

Will AI Save the Day? Not So Fast

Sure, if I were to debate QCOM stock with the value crowd, they would be quick to counter my bearish argument. While conceding that the company is facing challenges, they would counter QCOM’s valuation already takes these challenges into account.

More importantly, they would point out that, with the company’s potential to capitalize on the rise of AI, growth from this could outweigh China and customer-related challenges, and turn this (for now) out-of-favor stock into a “hot stock.”

Yet while the value investor’s bull case for Qualcomm at least has more substance to it than the dubious “value as its own catalyst” argument, here’s my counter to the view that QCOM is an AI winner in the making. For starters, the key word here is “potential.”

That is, while Qualcomm could in time successfully tap into growing demand for AI-capable smartphone/IoT chips, it’s unclear when (or even if) this will eventually happen.

In the meantime, unlike some other chip stocks being valued on already-evident AI catalysts, the market will likely continue to price QCOM on the aforementioned headwinds rather than on the mere “potential” to one day cash in on AI.

Bottom Line

Qualcomm may sport a low valuation, but this factor alone isn’t a reason to make it a buy. Far from being a case of market mis-pricing, investors understand this company is facing multiple challenges, and have priced it accordingly.

Even if the more value-focused crowd points to AI as a catalyst, this possibility for now isn’t enough to counter the evident issues with this company.

Don’t get me wrong. It’s not as if talk of AI with Qualcomm is all hype. The company is at work producing chips for this market, and there is a strong use case for these chips.

However, instead of buying now, as this catalyst remains in the “potential” stage, it may be better to wait for true “AI progress” to emerge before buying QCOM stock. Until then, keep on considering it a “value trap.”

QCOM stock earns a D rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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