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The Ratings Game: Qualcomm stock falls as backed up Apple iPhone inventory contributes to weak outlook

Qualcomm Inc. shares dropped Thursday after Wall Street digested a surprise weakness in sales to Apple Inc. for its iPhone and margin lows not seen in nearly three years.

Qualcomm QCOM, -5.41% shares fell more than 8% to an intraday low of $103.50 in morning trading, and were last down 6.8%, on track for their worst day since Nov. 3 when shares closed down 7.7%.

Shares started sliding late Wednesday after earnings were released, and accelerated their decline after execs on the conference call with analysts said inventory issues that were supposed to be handled by the end of June would now stretch out to “at least the next couple quarters” because smartphone demand had been weaker than previously forecast.

TD Cowen analyst Matthew Ramsay said that while he had forecast a miss for the June-ending quarter outlook, Apple’s AAPL, -0.91% iPhone modem inventory build/burn was a “surprise,” following “component pull-ins earlier in the year.”

Evercore ISI analyst C.J. Muse, who has an in-line rating and a $120 price target, said higher RF underutilization and higher foundry prices were “weighing on margins” for the “worst level since September 2020.”

Revenue from Qualcomm’s CDMA technologies, or QCT, segment that handsets, RF chips as well as chips for autos and “Internet of Things” fell 17% to $7.94 billion form a year ago, and its licensing segment, or QTL, saw revenue decline 18% to $1.29 billion.

Qualcomm guided for QCT margins of 23% to 25% on revenue of $6.9 billion to $7.5 billion, and QTL margins of 64% to 68% for the third quarter.

“Obviously, a key focus for investors from here is the trajectory into [the second half of 2023] and 2024. Here, we note a more upbeat outlook from management focused on ever-growing content, and getting paid for that expertise,” Muse said.

“We suspect the issue is Apple ordered above true sell-through in December and March, which is now coming back to haunt Qualcomm in the back half of the year,” said Susquehanna Financial analyst Christopher Rolland in a note, Rolland has a positive ratings on Qualcomm and a $135 price target.

Bernstein analyst Stacy Rasgon, who has an outperform rating and a $135 price target on the stock, suggested that while the cut was ugly, maybe it is one to be bought given shares remain “very inexpensive.”

“While we believe investors were expecting a miss, this was admittedly a somewhat sobering report,” Rasgon said. “That being said, there were some promising signs to latch on to as well. They have at least ‘confessed’ and seem to be doing what is necessary to de-risk [the September-ending quarter.]”

“Incremental handset weakness seems mostly Apple driven (which should ease as new models ramp into year-end, and frankly Apple is going away eventually anyway).” Rasgon said.

Of the 31 analysts who cover Qualcomm, 20 have buy-grade ratings, 10 have hold ratings, and one has a sell ratings, along with an average target price of $135.18, down from a previous $148.96.

Qualcomm shares were already lagging the broader chip sector and market before Thursday’s drop. Shares are now down 5% year to date, while the PHLX Semiconductor Index SOX, -0.98% is up 16%, the S&P 500 index  SPX, -0.78% has gained 6%, and the tech-heavy Nasdaq Composite Index  COMP, -0.38% has grown 14%.

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