Qualcomm (NASDAQ:QCOM) Misses Q3 Sales Targets, Provides Outlook Below Expectations

Max Juang /
2023/08/02 4:14 pm EDT

Wireless chipmaker Qualcomm (NASDAQ:QCOM) missed analysts' expectations in Q3 FY2023, with revenue down 22.7% year on year to $8.45 billion. Qualcomm made a GAAP profit of $1.8 billion, down from its profit of $3.73 billion in the same quarter last year.

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Qualcomm (QCOM) Q3 FY2023 Highlights:

  • Revenue: $8.45 billion vs analyst estimates of $8.51 billion (0.66% miss)
  • EPS (non-GAAP): $1.87 vs analyst estimates of $1.81 (3.35% beat)
  • Revenue Guidance for Q4 2023 is $8.5 billion at the midpoint, below analyst estimates of $8.74 billion
  • Free Cash Flow was -$639 million, down from $1 billion in the previous quarter
  • Inventory Days Outstanding: 159, up from 150 in the previous quarter
  • Gross Margin (GAAP): 55.1%, down from 56% in the same quarter last year

Having been at the forefront of developing the standards for cellular connectivity for over four decades, Qualcomm (NASDAQ:QCOM) is a leading innovator and a fabless manufacturer of wireless technology chips used in smartphones, autos and internet of things appliances.

The biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.

Sales Growth

Qualcomm's revenue growth over the last three years has been strong, averaging 28.5% annually. But as you can see below, its revenue declined from $10.9 billion in the same quarter last year to $8.45 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Qualcomm Total Revenue

Qualcomm had a difficult quarter as revenue dropped 22.7% year on year, missing analysts' estimates by 0.66%. This could mean that the current downcycle is deepening.

Qualcomm's revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 25.4% year-on-year revenue decline while analysts are expecting a 0.69% drop over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Qualcomm Inventory Days Outstanding

This quarter, Qualcomm's DIO came in at 159, which is 69 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Qualcomm's Q3 Results

With a market capitalization of $147 billion, a $8.63 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Qualcomm has the resources needed to pursue a high-growth business strategy.

It was good to see Qualcomm beat analysts' earnings expectations this quarter. That really stood out as a positive in these results. On the other hand, its revenue guidance for next quarter was underwhelming and its operating margin declined. Overall, this was a mixed quarter for Qualcomm. The company is down 3.32% on the results and currently trades at $125.03 per share.

Qualcomm may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.