QUALCOMM Incorporated (QCOM), valued at over $124 billion, specializes in wireless technology development, licensing, and smartphone chip design. The firm's key patents are focused on CDMA and OFDMA technologies, fundamental to all 3G, 4G, and 5G networks. As the world's principal wireless chips supplier, it furnishes high-end handset manufacturers with cutting-edge processors.
Canalys’ figures indicate the global smartphone market's persistent decline, marking its sixth consecutive quarter of reduction as of June 2023. Even while cautious optimism for a potential market resurgence remains, this downturn has tangible impacts on QCOM, a significant player in smartphone chip supply. The shrinkage, intensified by soaring competition from Chinese chipmakers, has notably impacted the firm’s revenue and profit margins last quarter.
The company experienced its sharpest stock dip in September, consequent to turmoil in China, which disrupted QCOM's sales in a critical market. The company faces manifold risks, amplified by the imminent wave of layoffs that has stirred public apprehension. The timing of this layoff news has coincided with persisting trade tensions between the U.S. and China and Beijing's enactment of a partial ban on using iPhones by government personnel.
According to recent filings with the California Employment Development Department, the semiconductor behemoth will eliminate approximately 1,258 jobs in San Diego and Santa Clara, California, to accommodate dwindling demand for its primary product.
The layoffs are a part of “restructuring actions” aimed at channeling resources towards “investments in key growth and diversification opportunities.” Although the loss of 1,258 employees will be felt, this figure represents less than 2.5% of QCOM's total workforce of 51,000 employees.
Concurrent with these measures, the company anticipates incurring substantial additional restructuring charges, most of which are expected to be borne in the fourth quarter of fiscal 2023. The company forecasts the successful completion of these additional actions by the first half of fiscal 2024.
Impact of the Layoffs
Potential layoffs at QCOM could be a strategic move to mitigate operating costs and bolster profitability and cash flow. This action can amplify the company's earnings per share and future dividend payouts and refocus its direction toward the core business and strategically significant growth sectors such as 5G technology, automotive tech, and IoT.
The latest data suggests that over 750 members of QCOM's workforce facing possible layoffs belong to engineering cadres, with positions ranging from directors to technicians. The remaining reductions will impact various roles, encompassing accounting and internal technical staff.
These substantial reductions in the workforce might slow down QCOM's manufacturing capacity, along with their research and development activities, which could stifle innovation in the long term. This scenario could pave the way for QCOM's competitors in the microchip manufacturing industry to seize a higher market share by providing more competitive products and services.
Given QCOM's ongoing challenges, investors may watch fundamentally sound stocks Apple Inc. (AAPL), Advanced Micro Devices, Inc. (AMD), and Intel Corporation (INTC).
Let’s discuss these stocks in detail.
Tech giant AAPL has continuously enhanced its capabilities by designing custom chips for hallmark products such as iPhones, iPads, and iPods over many years. The initiative to design these crucial components in-house significantly boosts the overall device performance and optimizes power efficiency.
To strive for a self-reliant development strategy, AAPL has gilded significant resources to produce its modem chips to reduce dependence on external suppliers like QCOM. However, the mission is yet to be fully accomplished.
AAPL has been integrating QCOM's and home-grown chips in the technology behind its flagship iPhones. Despite intense challenges faced by AAPL's ambitious Sinope project, which has yet to result in a standalone ability to produce a 5G modem chip, the spirit of innovation and the quest for excellence remains unscathed within the company.
This ambivalent situation was recently accentuated when AAPL extended its contract with QCOM to supply '5G modem chips', a deal set to last through 2026.
Indeed, developing a standalone 5G modem chip is arduous, though certainly not beyond the realms of possibility. With resilience and commitment to navigating challenges, it is undoubtedly just a matter of time before AAPL actualizes its dream of rolling out its home-grown 5G modem.
Considering AAPL's staunch determination and its record of technological advancements, realizing this ambitious objective seems attainable. It’s plausible that we might witness the introduction of AAPL’s modem even before the ongoing QCOM deal concludes in 2026.
Shares of AAPL have gained over 35% year-to-date. Wall Street analysts expect the stock to reach $207.51 in the upcoming 12 months, indicating a potential upside of 18.3%. The price target ranges from a low of $167 to a high of $240.
Advanced Micro Devices, Inc. (AMD)
Semiconductor giant AMD, which currently boasts a market cap of over $165 billion, is strategically positioned to meet the potential demands spurred by chip shortages that may result from QCOM’s proactive cost-cutting strategy.
Recovering convincingly from being on the verge of bankruptcy, AMD has seen its stock value increase from a dismal $3 per share. The remarkable turnaround can be attributed to the flourishing success of its Ryzen line of central processing units (CPU), launched in 2017.
Now, AMD sets its sights on the lucrative AI market, unveiling the latest iteration of its MI300 chips, which the company hails as its most powerful GPU. As the market yearns for fiercer competition, the new chip, set to commence shipping in 2024, feeds this demand.
Over the past three and five years, its revenue increased at 42% and 28.2% CAGRs, while its levered free cash flow grew at CAGRs of 83.7% and 103.7% over the same periods. AMD has massive potential over the long term, making its stock worthy to be monitored.
Shares of AMD have gained over 58% year-to-date. Wall Street analysts expect the stock to reach $137.48 in the upcoming 12 months, indicating a potential upside of 34.3%. The price target ranges from a low of $95 to a high of $160.
QCOM leads in the Android industry but faces stiff competition from chipmaker INTC in the PC market.
With a commendable market cap of over $150 billion, INTC plans to capitalize on the burgeoning AI market and presented a strategic vision last month to position itself as a pivotal architect of AI-integrated personal computers.
INTC recently debuted its glass substrates, designed to give the advanced packaging of chips a significant edge over traditional substrates. The innovation is expected to have positively impacted revenues in the third quarter.
In the same period, a critical alliance was formed between INTC and Tower Semiconductor Ltd., which could significantly impact the broader semiconductor ecosystem. The alliance showcases INTC's unwavering commitment to broadening its foundry services and manufacturing prowess.
Moreover, a significant breakthrough came when Ericsson chose INTC's 18A process and manufacturing technology to advance its next-generation 5G network. INTC was enlisted to produce custom 5G SoCs for Ericsson, projected to have fortified the company's top line in the third quarter.
Shares of INTC have gained over 34% year-to-date. Wall Street analysts expect the stock to reach $36.67 in the upcoming 12 months, indicating a potential upside of 2.8%. The price target ranges from a low of $17 to a high of $56.
