Chip stocks were trading horribly in quarterly earnings with Qualcomm (NASDAQ: QCOM) down nearly $50 from recent highs. By all accounts, the wireless chip giant had an explosive quarter and continued a trend of move the company away from a wireless-only focus. My investment thesis remains very bullish on stocks that trade at an ultra-low P/E ratio for the chip sector.

Strong transformation

Qualcomm reported revenue that beat analyst estimates and internal targets despite some feared downturns in the consumer electronics market. The wireless chip giant reported FQ2’22 revenue of $11.2 billion, beating estimates of $600 million.

The company actually reported quarterly earnings of $3.21 per share for the March quarter. Qualcomm released annual EPS in this lineup in fiscal year 2019 before updating license agreement with key customer Apple (AAPL) and the launch of 5G smartphones. Additionally, the wireless chip company now owns 75% of the Samsung (OTC:SSNLF) as a sign of a strong partnership with the smartphone leader.

Qualcomm has made great strides in growing revenue beyond handsets in the QCT business and license fees for QTL. Handsets revenue rose 56% to $6.3 billion, but the company actually saw key QTL revenue drop 2% to $1.59 billion in the second quarter of 2022, leading to a slight decline benefits.

It used to be that a low QTL neighborhood would sink the ship. Now, the shift to RF front-end, automotive and, in particular, IoT offers much better prospects for Qualcomm. The automotive segment remains the future with a massive backlog of over $16 billion, up $3 billion sequentially, while IoT is now driving growth with revenue of 1.7 billion resulting in faster growth than handsets at 61% in the quarter.

Also impressive, Qualcomm guided FQ3’22 revenue of $10.9 billion at the midpoint with analyst expectations in the $10.0 billion range. The chip company is on track to exceed June quarter guidance by a much larger amount than the March quarter.

Last quarter, the CEO informed the market that supply constraints were keeping sales artificially low. The stock fell despite this warning that any catch-up in the supply chain would accelerate earnings. This quarter, the CEO continues to suggest that supply chain issues remain an issue according to this statement on the earnings call:

Finally, demand remains strong for all of our technologies and continues to exceed supply. We believe our multi-sourcing and capacity expansion initiatives will continue to deliver incremental sourcing improvements throughout the year. With our One Technology roadmap and the demand for our products and solutions in virtually every industry, we’re in an incredible position to continue delivering high-performance, low-power computing on-device intelligence and all that which is wireless.

No price for the rise

For Qualcomm to justify a stock price of $140, the company had to disappoint the market by lowering expectations. The wireless chip giant did the exact opposite by raising expectations for the year.

On the contrary, these numbers support the stock trading at new yearly highs with old highs at $193. Analysts were actually slashing EPS estimates for years, but those numbers need to go up. At $200, Qualcomm would trade just 16 times FY23 EPS targets at $12.53.

Ultimately, investors need to start focusing on the automotive and IoT markets to drive revenue growth in the years to come. The company only generates $1.3 billion in automotive cadence revenue with bookings already 10 times that amount. This business, along with the IoT, topped $2.1 billion in quarterly sales, and those sales can only be expected to grow even as handsets peak with 5G over the next year. Qualcomm already has an automotive revenue target of hitting $3.5 billion a year in a few years.

The investment story is quite different with the knowledge that Qualcomm can become a consistent producer as the TAM expands with growth in new areas. The chip company is not some old, stale tech company with no growth, as this valuation multiple suggests. As my previous research has pointed out, the chip stock is unlikely to trade at such low forward P/E multiples against its peers.

Take away

The main investor takeaway is that Qualcomm is too cheap and these numbers confirm that the future remains bright. The company is still not responding to demand. Investors should take advantage of this year’s weakness to recharge.