Amid the focus on artificial intelligence (AI), numerous investors have turned to "Magnificent Seven" stocks like Nvidia. Indeed, all seven of those stocks utilize the technology, which has likely contributed to rising share prices.
That does not mean investors should forget chip stock Qualcomm (NASDAQ: QCOM). The smartphone chipset maker leads the way in 5G chips and is diversifying its revenue base into other areas, including areas that will rely on AI.
Qualcomm's stock suffered amid sluggish smartphone sales. However, the stock is up 60% from its October low, and given the company's importance in the tech market, now might be the time to consider the stock. Here's why.
Qualcomm and AI
Qualcomm stock has suffered along with the economy. As the economy became sluggish, smartphone sales slowed, and with 5G-equipped Apple iPhones available for more than three years, sales related to the 5G upgrade cycle have slowed.
Still, investors should know that Qualcomm is all in on generative AI. During the company's most recent shareholder meeting, CEO Cristiano Amon touted the benefits of Snapdragon 8 Gen 3, the company's AI-enabled chip.
That chip can support AI models with up to 10 billion parameters directly from a device. Additionally, it contains improved CPUs and GPUs, and its Qualcomm Spectra technology can produce AI-enhanced photos.
Investor reactions
However, investors did not initially warm to the idea of Qualcomm as an AI stock. This is not for a lack of AI-related efforts. It has long researched neural networks and applied machine learning to precise radio frequency (RF) positioning. Also, it works with quantum AI to achieve exponential performance increases.
Despite such technology, Qualcomm stock remained rangebound until late last year. Now, investors have become more aware of Qualcomm's AI capabilities, and this led to a steady increase in the stock.
Qualcomm by the numbers
Admittedly, AI has not helped Qualcomm match the triple-digit revenue growth of Nvidia. Still, Qualcomm's financials have experienced considerable improvement. In the company's first quarter of fiscal 2024 (ended Dec. 24, 2023), its revenue of $9.9 billion grew 5% yearly amid growth in handset sales. Considering that revenue dropped 19% in fiscal 2023, the cyclical downturn in the chip industry has likely reversed.
Also, net income according to generally accepted accounting principles (GAAP) for fiscal Q1 came in at $2.8 billion, improving by 24% as the company's costs and expenses did not change significantly during the quarter. Additionally, even if revenue does not improve significantly in Q2, Qualcomm's GAAP diluted earnings per share (EPS) is expected to rise 20% at the midpoint, pointing to continued improvement.
Amid those increases, the P/E ratio climbed to around 23 in recent months. However, such an earnings multiple is relatively low by historical standards, indicating the potential for multiple expansion should interest in its AI chips grow further.
Consider Qualcomm stock
With Qualcomm increasingly seen as an AI stock, it looks increasingly like a buy. Indeed, revenue growth was slow, and handset sales only recently began to recover.
Nonetheless, smartphones are going to play a critical role in AI, and the fact that Snapdragon chipsets are increasingly optimized for AI is good for consumers and shareholders alike. Considering that the stock sells at a low earnings multiple, investors may want to buy now before others begin to notice its improving value proposition.
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Will Healy has positions in Qualcomm. The Motley Fool has positions in and recommends Apple, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.
