Qualcomm's Turnaround Is Working, So Why Is Wall Street Selling?

Qualcomm’s Turnaround Is Working, So Why Is Wall Street Selling? Qualcomm's revenue beat expectations on strong Automotive and IoT growth, but earnings and forward guidance disappointed, sending shares down about 4% after hours. Apple's transition away from Qualcomm modems is accelerating faster than expected, cutting Qualcomm's projected iPhone share well below the roughly 20% previously modeled. Qualcomm is diversifying beyond smartphones with rising Automotive revenue and upcoming data center chip shipments, though CapEx and memory costs are climbing. Qualcomm Inc NASDAQ: QCOM has spent much of the past few months trying to convince the market that it’s more than just a smartphone chipmaker. Its earnings report, delivered July 29, will have disappointed investors looking for a clear update on whether that transformation is taking hold, as the takeaways were decidedly mixed. The headline numbers told two stories at once. Revenue for the quarter comfortably beat expectations, driven by the diversification the company has been promising. Yet, earnings came in short, and the guidance for the quarter ahead landed below what Wall Street wanted to see. That was enough to send the stock down about 4% in Wednesday's after-hours session. For anyone following the Qualcomm story, this was always going to be a quarter that mattered more than most. The question now is whether the progress beneath the headlines is sufficient to make this an entry opportunity or whether the near-term headwinds are too strong to overcome. The single most encouraging takeaway was the performance of the businesses Qualcomm is betting its future on—its Automotive segment. This was the standout from the report, with revenue surging more than 60% year-over-year, prompting management to raise its outlook for the segment yet again. Qualcomm’s Internet of Things (IoT) business grew at a healthy clip, too, helping comfort investors spooked by Qualcomm’s Handset revenue dropping 20%. This matters in the context of everything the company has been telling Wall Street. As we saw following its Investor Day last month, Qualcomm has staked its future on reducing its dependence on smartphones, and these results are the clearest evidence yet that those plans are working out. Qualcomm’s data center ambitions are another part of the business that bulls have been excited about, and the earnings report showed solid progress. Management confirmed that its first custom silicon shipments for data centers are expected in the current quarter, turning what had been a roadmap promise into a concrete timeline. Unsurprisingly, none of this came for free, and Qualcomm's capital expenditure (CapEx) has been climbing sharply at the same time. For now, that spending remains modest relative to overall sales, so this is nothing like the eye-watering CapEx numbers being seen elsewhere in the chip world. But it is a trend worth watching, particularly if the data center revenue takes longer to arrive than management hopes. If there was one clear negative in the report, it was the update on Apple Inc. NASDAQ: AAPL. Qualcomm has long known that Apple is working to replace Qualcomm's modems with its own in-house design. Still, management revealed that this transition is now happening faster than previously expected. The company's share of the upcoming iPhone launch is expected to be materially lower than the roughly 20% it had been modeling, a meaningfu...