Does Qualcomm's Solid Q1 Earnings Warrant a Portfolio Re-Look?

Qualcomm Incorporated QCOM reported strong first-quarter fiscal 2026 results, with record revenues driven by healthy demand trends in IoT and automotive businesses. Adjusted earnings exceeded the Zacks Consensus Estimate, led by the strength of its business model, diversification initiatives and its ability to respond proactively to the evolving market scenario. However, revenues missed the consensus estimate despite increasing year over year.

Supply Chain Headwinds Throttle QCOM

Although Qualcomm witnessed healthy traction in premium Android handsets in the fiscal first quarter, driven by broad OEM adoption for dual flagship products and transition toward AI-native smartphones, handset revenues are likely to be adversely impacted in the second quarter owing to constrained supply. This is primarily because memory suppliers are increasingly redirecting their manufacturing capacity to meet the burgeoning AI data center demand, resulting in an acute shortage and inflated prices for the handset industry. This, in turn, has forced several handset OEMs to reduce their chip inventory, hurting Qualcomm’s handset revenues.   

The company expects softness in the handset market and a weaker overall mix of devices to continue in the near future. Consequently, Qualcomm has offered a bland outlook for the second quarter with GAAP revenues of $10.2-$11 billion. Non-GAAP earnings are projected to be $2.45-$2.65 per share, while GAAP earnings are likely to be $1.69-$1.89 per share.  

Frosty U.S.-China Trade Ties, Margin Woes Hurt QCOM

Qualcomm is expected to face softness in demand from China. The chip-making firm has a significant presence in more than 12 cities in China, aiming to drive advancements in semiconductors and mobile telecommunications for the larger benefit. The company has been a key supplier of chips and other related components to local smartphone manufacturers like Xiaomi, Huawei and its spin-off brand Honor. However, it appears that Qualcomm is increasingly finding it difficult to maintain its operations in the communist nation due to the continued U.S.-China trade spat.

The U.S. Commerce Department has long imposed various trade restrictions against China that banned the sale of high-tech equipment, chips, components and related technology to develop high-end smartphones and AI-enabled chips. As Washington tightens trade restrictions, Beijing has intensified its push for self-sufficiency in critical industries. This shift poses a dual challenge for QCOM, as it faces potential market restrictions and increased competition from domestic chipmakers.  

In addition, Qualcomm faces stiff competitive pressures from rivals Hewlett Packard Enterprise Company HPE and Broadcom Inc. AVGO. Aggressive competition from low-cost chip manufacturers and established players in the mobile phone chipset market is also likely to hurt profits. Although the global smartphone market is expected to maintain its momentum over the next three to four years, a major portion of this growth is likely to come from the low-cost emerging markets, which may weigh on Qualcomm's margins. 

QCOM Buoyed by Snapdragon, Automotive Businesses

Despite the short-term headwinds, Qualcomm is benefiting from investments toward building a licensing program in mobile. Leveraging processors with multi-core CPUs with cutting-edge features, amazing graphics and worldwide network connectivity, Qualcomm Snapdragon mobile platforms are fast with superb power efficiency. Smartphones and mobile devices built with Snapdragon mobile platforms enable immersive augmented reality and virtual reality experiences, brilliant camera capabilities, superior 4G LTE and 5G connectivity with state-of-the-art security solutions. The buyout of U.K.-based chip firm Alphawave Semi offers Qualcomm an opportunity to expand its presence in high-growth applications, including data centers, AI, data networking and data storage. 

Automotive revenues in the fiscal first quarter rose 15% to a record $1.1 billion, driven by increased content in new vehicle launches with its Snapdragon Digital Chassis platform, with automakers deploying high-performance, low-power computing and connectivity chips to bring next-generation experience to consumers. Qualcomm is gaining traction in the vehicle-to-everything (V2X) communication systems market with the buyout of Autotalks. With seamless access to Autotalks’ comprehensive V2X expertise, Qualcomm has been able to offer an extensive suite of automotive-qualified global V2X solutions for installation in vehicles, as well as two-wheelers and roadside infrastructure. The company’s V2X chipsets offer production-ready standalone solutions that are purpose-built for global applications, resulting in direct communication becoming more pervasive.

Price Performance

Over the past year, Qualcomm has declined 19.8% against the industry’s growth of 34.7%, lagging peers like Hewlett Packard and Broadcom. Hewlett Packard has surged 10.2%, and Broadcom is up 41.7% over this period. 

One-Year QCOM Stock Price Performance

Estimate Revision Trend

Earnings estimates for Qualcomm for fiscal 2026 have moved down by 19 cents to $11.74 over the past seven days, while the same for fiscal 2027 has declined by 6 cents to $12.17. The negative estimate revision depicts that investors are bearish about the stock.

End Note

With robust automotive and Snapdragon traction, Qualcomm expects healthy revenue contribution from these businesses. A strong emphasis on quality, diligent execution of operational plans and continuous portfolio enhancements are driving more value for customers. 

However, stiff competition and softness in key end markets are likely to put pressure on the bottom-line growth. High R&D costs erode its profitability to a large extent. Qualcomm is facing a tough operating environment in China amid escalating tariffs, raising questions about its long-term viability plans in the communist country. In addition, constrained memory supply is undermining its handset revenues, hampering its overall revenue trajectory. The downward estimate revisions further portray pessimism about the stock’s growth potential. Consequently, it might be prudent to avoid the stock now.

Qualcomm carries a Zacks Rank #4 (Sell). 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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