Qualcomm Earnings: Wait for Data Center Proof

Qualcomm shares fell 11% on October 30, closing at $164.79, as a broad semiconductor sell-off hit the sector. The decline came after Intel warned of lower fourth-quarter revenue and a PC slowdown that could last until mid-2027, dragging the PHLX Semiconductor Index down about 7% that day. Qualcomm itself had no company-specific news.

The stock is now about a third below its May 29 record close of $251.02, after a wild ride that saw it more than double from its early-April low. Investors are now focused on Qualcomm's fiscal fourth-quarter report, due after the close on Wednesday, November 4.

Qualcomm's handset business has been shrinking all year. Handset chip revenue fell 13% in the March quarter and 20% in the June quarter, to $5.1 billion, due to tight memory supply and rising prices that hurt demand from phone makers. Apple is another drag: Qualcomm expects its share of new iPhone launches to be well below its earlier 20% estimate, and it forecast Apple revenue dropping around 50% from the September quarter to the December quarter.

For the September quarter, Qualcomm guided for revenue of $9.7 billion to $10.5 billion and adjusted earnings per share of $2.05 to $2.25. At the midpoints, that's roughly 10% and 28% below the year-ago quarter. However, the more important piece will be the outlook for the December quarter, when revenue from two new data center deals is set to begin.

Qualcomm's future growth hinges on its ability to diversify beyond smartphones. The company has custom chip deals with two major cloud computing companies, and revenue from both should start in the December quarter. Management targets over $15 billion in data center revenue by fiscal 2029, a lofty goal that, if achieved, would transform Qualcomm's business.

The auto business offers a preview of what a successful ramp looks like. Automotive sales hit a record $1.6 billion in the June quarter, up 61% year over year, with growth accelerating from 38% in the March quarter and 15% in the December quarter. If data center follows a similar trajectory, it could become a significant revenue driver.

However, profitability is a trade-off. Qualcomm's chip segment pre-tax margin slipped to 26% in the June quarter from 31% in the December quarter, as higher wafer and memory costs preceded price increases. The December quarter guidance will show whether Android growth and initial data center sales can offset the Apple decline.

At around 17 times expected fiscal 2027 earnings, Qualcomm trades at a slight discount to the S&P 500's forward P/E of about 19. That valuation suggests the market is pricing Qualcomm as a phone-chip maker losing Apple's business, with little credit for data center success. But until those deals show up in reported revenue, the risk remains.