Qualcomm (NASDAQ:QCOM) made a relatively successful stock trade in 2024. Toward the middle of June, Qualcomm’s shares rose as much as 58.5% for the year. A sustained technology sector rally, as well as the inroads the semiconductor firm has made in artificial intelligence, were just a couple of the reasons QCOM has enjoyed a healthy price surge.
Unfortunately, the AI-fueled rally may be heading toward an end. Last week, big tech stocks took a major hit, as investors grew increasingly fatigued over AI. In particular, the Nasdaq 100 lost $1 trillion in market value, bringing down shares of major chipmakers companies. Those include Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), Arm Holdings (NASDAQ:ARM) and Qualcomm.
Let’s explore three reasons Qualcomm probably will not make a great long-term investment.
More Trade Restrictions Could Be on The Way
Trade tensions between the U.S. and China have been escalating since Donald Trump was in office. The Biden Administration has heightened the geopolitical rivalry even more. A couple of weeks ago, Bloomberg News reported the administration had warned its allies that it had been seeking to impose even harsher export controls that would allow the U.S. to impose restrictions upon “foreign-made products that use even the tiniest amount of American technology.”
While this is set to really hamper the production of the Netherland’s ASML (NASDAQ:ASML) and Japan’s Tokyo Electron (OTCMKTS:TOELY), most chipmakers that have operations in China will see a negative impact.
In fiscal year 2023, which ended on September 24th, revenue from companies with operations in China represented 62.5% of the semiconductor firm’s $35.8 billion top-line figure. If the geopolitical tensions between China and U.S. don’t simmer down, and it doesn’t look like they will soon, then no matter who wins in November, Qualcomm could end up getting the short end of the stick in the long run.
AI PC Chips Still Have Much to Prove
There was a lot of talk about Qualcomm’s latest Snapdragon X Elite AI chips that would go into modern PCs. This system-on-a-chip (SoC) leverages what Qualcomm is calling the integrated Hexagon™ NPU. The AI chip allows users to train large language models on their laptops. A number of PC makers are looking to utilize Qualcomm’s latest SoC in their laptops. Microsoft (NASDAQ:MSFT) is one of them. The software giant announced a Surface laptop and tablet that will employ the Snapdragon X Elite. Lenovo (OTCMKTS:LNVGY), Dell (NYSE:DELL) and Acer, among several others, are also launching similar PCs.
Qualcomm is hoping an array of AI chips will spur demand for consumer electronics, but I believe that hope is misguided. Consumer demand is by no means picking up. Moreover, consumer confidence has been waning this year. AI features may not get consumers to rush to buy electronics when inflation is still high and budgets face constraints.
Qualcomm’s Valuation Is Not an Opportunity
The final point to make about Qualcomm regards the SoC maker’s trading valuation. QCOM trades at 17.1x forward earnings. This implies the chipmaker is trading at a significant discount to many of its peers. AI chipmaker Nvidia boasts a frothy valuation of 38x forward earnings, while competitor AMD doesn’t lag too far behind. Arm Holdings, which supplies the architecture upon which many Qualcomm CPUs are based, trades at an even higher 89.8x forward earnings.
Value investors looking for undervalued stocks would be happy to find Qualcomm trading at such a discount. However, Qualcomm’s exposure to the smartphone market, which continues to be in a doldrum, not just due to waning consumer demand but also to a glut of smartphones in the market, does not bode well for Qualcomm’s long-term growth.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.