Stock Market

Over the past month, there’s been growing awareness about Quaclomm’s (NASDAQ:QCOM) potential to benefit from the growing integration of artificial intelligence applications. However, has this had an impact on the price of QCOM stock?

Not really. Since chatter about this possible catalyst emerged, shares in the mobile chip maker have traded sideways.

While up by double-digits year-to-date, QCOM has underperformed relative to the tech stocks more greatly associated with the “AI megatrend.”

There is a reason for this. Near-term headwinds continue to affect sentiment for the stock negatively. It’s also why some, including Louis Navellier, have called the stock a “value trap.”

However, is it possible for QCOM to not only shake off this “value trap” reputation, but become one of the “hot stocks” soaring higher because of AI? To answer this questions, let’s dive in, and take a closer look at the situation.

 No Respect for its Possible AI Catalysts

Qualcomm’s strong chances of benefitting from the rise of AI is not a new revelation. For example, for years we have known that the company has the potential to capitalize on likely rising demand for advanced automotive chips for applications like self-driving.

But back in June, one sell-side analyst (TD Cowen’s Matthrew Ramsay) argued that there is a generative AI catalyst as well for QCOM stock.

As growing adoption of generative AI requires electronic devices smartphones to have AI computing capabilities, Qualcomm will benefit, as it has the expertise to produce the chips necessary to facilitate this.

Ramsay currently has an “Outperform” rating on the stock, along with a $135 per share price target. Yet while analysts appreciate Qualcomm’s AI potential, one can say QCOM is the Rodney Dangerfield of AI plays: no respect at all for its potential in this field.

Again though, this lack of respect is somewhat justified. Unlike, say, Nvidia (NASDAQ:NVDA), which has already reaped tangible benefits from the generative AI trend, “possible” remains the key word here for Qualcomm.

Also, for now, factors outside this secular growth trend matter more when it comes to this company’s prospects.

Can This Change?

Non-AI headwinds are still what’s top of mind among investors with QCOM stock. A big one is the softening of demand for the Qualcomm’s chips in recent quarters, which has weighed heavily on recent operating results.

For instance, last fiscal quarter (ending March 26), the company reported a 17% drop in revenue, and a 41% decline in earnings per share.

Big decreases in handset and internet of things  chip sales far outweighed what was another quarter of vigorous growth (20%) for Qualcomm’s nascent automotive chip business.

Not only that, alongside the earnings release, management provided the market with a bleak outlook, suggesting high uncertainty over when exactly a recovery in smartphone chip demand will take shape.

In addition, as Navellier referenced in his aforementioned “value trap” argument for QCOM, Qualcomm is facing a geopolitical headwind as well. Rising Sino-American tensions bode badly for the company’s Chinese business, which make up a staggering 64% of its overall sales.

So, while it’s clear why the market is focusing on these problems rather than Qualcomm’s AI potential, the question is, “can this change?” Possibly, but only if, similar to Nvidia, Qualcomm starts reporting some AI-boosted quarterly results.

More Importantly, Is Qualcomm a Buy?

Unfortunately, I’m not confident that QCOM will soon have a “Nvidia moment” of its own. Non-AI smartphone/IoT demand, along with the situation between the U.S. and China, will likely continue to matter more for QCOM’s near-term performance.

Still, don’t assume this means shares are a clear-cut “avoid” situation. QCOM today trades for only 14.3 times already walked-back earnings estimates. One can argue that much of the uncertainty surrounding Qualcomm’s headwinds are already priced-in.

Even if it takes longer-than-expected, Qualcomm’s annual earnings should head back to its prior high-water mark ($11.38 per share). This would result from a recovery in chip demand, plus AI-related chip demand growth.

Despite the negativity, AI still could increase the chances of a QCOM stock comeback. With this, any further weakness may be a buying opportunity.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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