It’s much too early to write off this semiconductor stock.
The recent sell-off in tech stocks did not leave Qualcomm (QCOM -0.67%) unscathed. Although the stock price has stopped falling significantly for now, it has fallen 30% since peaking in June as investors started to sell artificial intelligence (AI) stocks.
Nonetheless, as a Qualcomm shareholder, my confidence in the company has not diminished, even though the semiconductor stock has pulled back. Instead, I plan to continue holding, and three key reasons explain why.
1. Industry leadership
For all of the competitive threats, Qualcomm remains the leader in smartphone chipsets. Much like Nvidia dominates the AI chip market, Qualcomm consistently stayed ahead of the competition on the smartphone chipset side, continuing to innovate and stay ahead of well-funded and highly motivated competitors.
MediaTek competes with it in the 5G space, albeit at the lower end. Also, Apple has tried to free itself of the need for Qualcomm since it bought Intel‘s smartphone chipset business. However, the fact that it keeps renewing the supply agreement with Qualcomm implies its failure to match its technical prowess.
Moreover, with the 5G upgrade cycle running its course, Qualcomm’s next upgrade cycle may come from AI. The release of the Snapdragon 8 Gen 3 chip offers AI functionality to smartphones, which has become increasingly critical to more users.
2. Other products
Such innovation has also led Qualcomm to develop new business lines and create products outside the smartphone chipset realm.
As the name implies, the IoT segment makes products for Internet of Things applications. Such products support smart homes, smart cameras, monitoring of remote stations, and robotics.
Qualcomm has also built an automotive segment. Its digital chassis takes the company into the autonomous driving space, while a digital cockpit supports safety, navigation, and automotive communications.
More recently, it has applied its growing AI prowess to develop chips for personal computers. Although it is unclear how well it will compete with incumbents such as Intel and Advanced Micro Devices, its Snapdragon platform delivers high performance, detailed visuals, and long battery life.
Admittedly, the handset segment continues to lead the company, accounting for 63% of revenue in the third quarter of fiscal 2024 (ended June 23). Still, IoT made up around 15% of revenue, and thanks to an 87% yearly growth rate, automotive is now 9% of company revenues.
3. Reasonable valuation
Moreover, unlike its chip counterparts, Qualcomm has maintained a low valuation. Its price-to-earnings ratio is currently 21. This leaves it with the lowest earnings multiple among major chip stocks.
Admittedly, in the recent past Qualcomm stock was cheap for a reason. As the 5G upgrade cycle ran its course and smartphone sales declined, revenue growth turned negative as the chip stock entered a cyclical downturn, a periodic occurrence for most every chip stock.
However, revenue growth is back in the double-digits, rising 11% yearly to $9.4 billion in fiscal Q3. Also, Qualcomm limited the growth of its costs and expenses, allowing net income to come in at $2.1 billion, rising 18% compared to year-ago levels.
This makes Qualcomm especially cheap when considering the growth rate. Additionally, Qualcomm has grown at a much faster rate during upgrade cycles, meaning investors could have an unprecedented bargain on their hands as more smartphone users upgrade to 5G.
Buy Qualcomm
Amid the pullback in the stock price, investors should consider Qualcomm stock. Cyclical downturns have hurt the stock and Nvidia remains the leader in AI, but Qualcomm appears poised to inspire another upgrade cycle thanks to AI. And it has reduced its dependence on the handset segment by competing in the IoT, automotive, and PC businesses.
Moreover, the 21 earnings multiple looks increasingly like a bargain. Such attributes should ultimately increase Qualcomm’s stock price over time. When such benefits are combined with a bargain valuation, investors should consider adding shares.
Will Healy has positions in Advanced Micro Devices, Intel, and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Qualcomm. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.