Qualcomm (QCOM.US) Earnings Preview: Rising Memory Chip Prices May Deal a Heavy Blow to the Smartphone Market; Bernstein Cuts Price Target to $155

Wall Street research firm Bernstein said in a research report released on Monday that Qualcomm's (QCOM.US) short-term earnings outlook is facing increasing pressure as rising memory chip prices continue to hit the smartphone market. Although the company is actively expanding into automotive, IoT, and data center businesses, smartphone chips remain its main source of revenue. Bernstein is concerned that the smartphone market may repeat the sharp demand decline recently seen in the personal computer (PC) market, and has therefore lowered its forecasts for Qualcomm's future performance and cut its price target from $165 to $155, maintaining a "Market Perform" rating. Qualcomm will report fourth-quarter fiscal 2026 results after the U.S. market closes on November 4. Bernstein expects quarterly revenue of about $10.1 billion and adjusted earnings per share of $2.15, broadly in line with the Visible Alpha consensus of $10.1 billion in revenue and $2.17 per share, and also largely consistent with the company's previously issued guidance. However, Bernstein believes that what investors should really focus on is not the upcoming quarterly results, but the impact that weak smartphone demand may have on next quarter and fiscal 2027 performance. The firm cut its first-quarter fiscal 2027 revenue forecast for Qualcomm to $10.2 billion from $10.6 billion previously, and lowered its adjusted earnings per share forecast to $2.21 from $2.34, both below the consensus estimates of $10.6 billion and $2.32. For the full fiscal 2027 year, Bernstein cut Qualcomm's revenue forecast to $42.2 billion from about $44.9 billion previously, and lowered its adjusted earnings per share forecast to $8.77 from $9.57. By comparison, the consensus estimates are $45.1 billion and $10.02, respectively. Bernstein's downgrade is mainly driven by continued deterioration in smartphone market demand, especially in the Android phone market on which Qualcomm is highly dependent. Industry data cited in the report show that global smartphone shipments in the third quarter of 2026 fell 22% year over year, performing even worse than the post-COVID market trough in 2022. Unlike the usual seasonal pattern of sequential shipment growth, smartphone shipments in the third quarter of this year fell about 8% quarter over quarter. Excluding Apple Inc. (AAPL.US), the year-over-year decline in global smartphone shipments widened further to 26%, with an 11% quarter-over-quarter drop, marking one of the worst third-quarter performances in years. Bernstein noted that these figures closely resemble the recent weakness in the PC market. Previously, Intel Corporation (INTC.US) cut its outlook due to a sharp deterioration in PC demand, triggering a steep stock selloff. The firm is concerned that rising memory chip prices may similarly curb smartphone production and consumer demand, in turn hitting Qualcomm's chip sales. Although Bernstein believes that Qualcomm had not supplied chips to the market at a scale that clearly exceeded end demand, as some PC chipmakers did, its current-quarter mobile chip revenue forecast is still significantly above the overall smartphone market growth trend. In addition, Bernstein believes that Qualcomm's previous expectation that Android-related revenue would be roughly flat in fiscal 2027 is becoming increasingly difficult to achieve. The firm now expects Android-related revenue to decline by a high-single-digit percentage in fiscal 2027, versus its previous forecast of roughly flat. The continued loss of Apple Inc. business is another major pressure point. Bernstein estimates that Apple Inc.-related chip business contributed about $7.5 billion to $8 billion in revenue to Qualcomm in fiscal 2026, but as Apple Inc. gradually shifts to self-developed modem chips, Qualcomm's revenue from Apple Inc. in fiscal 2027 could decline by about $6 billion year over year. This means that even if the Android phone business remains stable, Qualcomm will still face a significant revenue gap caused by reduced Apple Inc. orders. And with Android market demand also weakening, pressure on the company's overall mobile chip business growth will intensify further. It is worth noting that the smartphone business still accounts for most of Qualcomm's chip business revenue. Bernstein data show that in the trailing 12 months ended the third quarter of fiscal 2026, about 68% of Qualcomm's chip business revenue came from mobile phones, while automotive and IoT accounted for 13% and 19%, respectively. Although Qualcomm has actively promoted business diversification in recent years and made progress in automotive, IoT, and data center areas, these new businesses are still unlikely to fully offset the pressure facing the mobile business in the short term. Among them, the data center business is seen by Bernstein as an important driver of Qualcomm's future growth. The firm expects the data center business to bring about $5 billion in revenue growth in fiscal 2027, partially offsetting the impact of losing Apple Inc. business. Bernstein believes that as the data center business gradually scales up, Qualcomm's earnings performance in fiscal 2028 to 2029 is expected to improve again. Before that, however, the company's short-term earnings expectations may still need to be revised down further. From a valuation perspective, Qualcomm's current share price is not expensive. According to the report, as of October 30, Qualcomm's forward price-to-earnings ratio was about 16.5 times, below the average of about 18.2 times for constituents of the Philadelphia Semiconductor Index and also below the S&P 500's level of about 19.5 times. But Bernstein believes that the lower valuation is not yet enough to offset the risks brought by continued deterioration in the smartphone market. As of October 30, Qualcomm's share price was $164.79. Bernstein's latest $155 price target implies about 6% downside from the closing price at that time. Bernstein said that although Qualcomm's expansion prospects in automotive, IoT, and data centers are becoming more credible, weakness in the smartphone market remains the main risk that cannot be ignored in the short term. For the upcoming earnings report, investors need to focus on Qualcomm's latest assessment of smartphone demand in 2027, the impact of memory chip price increases on customers' production plans, and whether the data center business can scale up as expected.