Qualcomm Plunges After Smartphone Demand Weakness Persists

Days after Sony Group Corp., the world's top provider of image sensors for smartphones, warned a recovery in handheld devices wouldn't occur this year, Qualcomm Inc., the largest maker of smartphone processors, presented more industry gloom. 

On Wednesday, Qualcomm announced second-quarter earnings, which ended March 26, were in line with analyst expectations. However, revenue from handset chips, a core business for the San Diego-based company, experienced a 17% plunge compared to the same period last year. 

Weak demand for smartphones increased handset chip inventory, the company's primary revenue source. CEO Cristiano Amon assured investors that orders would rebound once phone manufacturers deplete inventories. However, he said, this clearing process might take longer than initially expected. To mitigate future risks, he said Qualcomm would diversify chipmaking into other sectors, such as automotive, networking, computing, and wearable devices. 

"As we navigate this challenging environment, we remain focused on the critical factors we can control to emerge stronger from this downturn — our leading technology road map, best-in-class product portfolio, strong customer relationships and operational efficiencies," Amon said in the statement. He continued:

 "Our top priority remains to execute our diversification strategy and invest in areas that drive long-term value."

Qualcomm offered a bearish outlook for smartphones, expecting the total market to contract by a percentage range in the high single digits in 2023. It forecasted inventory reductions by companies would continue for two more quarters. Amon also said China demand has yet to return. 

"Common sense and the overall expectation was that the China market was going to bounce back," he said on a conference call with analysts. "We've not seen those signs yet."

Qualcomm's bearish view was shared by Sony's statement from last week, which suggested no signs of recovery in smartphone markets in the immediate future. 

Shares of Qualcomm trading in New York on Thursday morning were down as much as 8%. 

Here is the reaction from Wall Street analysts covering Qualcomm (list courtesy of Bloomberg):

Morgan Stanley (overweight, PT $125) 

• Surprised by Qualcomm's "characterization of the drawdown as an Apple phenomenon" 
• "Weaker smartphone business will persist at least through September"

KeyBanc (overweight, PT $145 from $160) 

• Demand for smartphones has deteriorated as China remains weak
•  "Macro headwinds intensify, compounded by AAPL's pull-ins"

Piper Sandler (Overweight, PT cut to $120 from $145) 

• Qualcomm reported mixed quarterly results, forecast was below due to inventory corrections
•  "Potential pre-buying from Apple, which is going to result in muted seasonality for the September 2023 quarter"

Vital Knowledge 

• The results "were fine," but the outlook "was very light" and the comments about the macroeconomic backdrop were "gloomy"

Third Bridge 

• The results show "persisted weakening in the smartphone market," and the outlook "says that for the short term, these challenging conditions are likely to persist"
•  "By the end of 2023, inventories will start to be cleared out, and the market will begin to stabilize in 2024"

Concerns about recession may be pushing demand lower for pricy smartphones and other electronics among consumers.