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Fueled by robust growth in its Automotive business and sturdy sales in its core handset business, Qualcomm (QCOM) surpassed Q3 EPS and revenue estimates and provided a solid Q4 outlook with its forecast for EPS and revenue both coming in ahead of expectations at the midpoint of the guidance ranges. Yet, the stock is still down sharply, extending a steep selloff that has seen shares plunge by 27% since mid-June.

• Initially, the stock popped higher after QCOM's results and guidance were released. Indeed, there was good reason to feel bullish with Automotive revenue soaring by 87% yr/yr to $811 mln and Handset revenue climbing higher by 12% to $5.9 bln.
  • Increasing adoption and a steady stream of design wins for QCOM's Snapdragon Chassis, including more than ten in Q3, is driving Automotive's impressive growth, while the emergence of AI-powered smartphones is providing the Handset business with a boost.

Those initial positive vibes, though, faded during the earnings call and the stock went into reverse.

• One issue is that QCOM provided a muted outlook for the handset market this year, indicating that the recovery is struggling to gain momentum. CEO Cristiano Amon stated that global handset units are expected to be flat to slightly up yr/yr, merely reaffirming QCOM's forecast from Q2.
  • Relatedly, Arm Holdings (ARM) issued disappointing guidance for Q2 and FY25, adding to the souring sentiment around semiconductor stocks.
• Another factor that pulled shares lower was Mr. Amon's disclosure that its license to export products to China-based Huawei was revoked on May 7. That license wasn't set to expire until late CY24, so the removal of Huawei-related revenue is coming a litter sooner than anticipated. Consequently, this change will impact QCOM's revenue in Q4 -- which was incorporated into its guidance -- and its revenue in 1Q25. 

The main takeaway, though, is that the anticipated AI-based growth catalyst for QCOM isn't materializing quite as quickly or powerfully as investors had hoped for. Currently, AI smartphones account for less than a quarter of the total market, and the non-AI smartphone market is still stagnant, as illustrated by QCOM's FY24 handset growth outlook. Along with its rapidly expanding Automotive business, the emergence of new AI smartphones will eventually become a significant growth driver, but it will take some time before that catalyst fully materializes.