Qualcomm Faces Margin Pressure From Rising Costs: Can it Recover?
Qualcomm Incorporated QCOM is facing near-term margin pressure as rising semiconductor input costs, weaker smartphone demand and an unfavorable product mix weigh on its QCT business. In the third quarter of fiscal 2026, QCT EBT margin declined to 26% from 30% a year earlier. The company expects the metric to fall to 23-25% in the fiscal fourth quarter.
The primary pressure is coming from higher costs across the semiconductor supply chain. Qualcomm cited increases in wafer fabrication, assembly, testing, advanced packaging, memory and other materials, which are increasing product costs. QCOM is responding with a price hike. However, it has existing contracts with customers that have fixed prices; hence, it will take several quarters to get margin gains from those price increases.
Qualcomm is also dealing with a weaker mix within the premium handset market. Several handset OEMs are responding to the higher memory costs by changing chip selections and using prior-generation premium processors. This strategy can reduce the average value of the chip mix and put additional pressure on QCT margins.
QCT handset revenues fell 20% year over year to $5.09 billion in the fiscal third quarter as major OEMs reduced purchases. The handset weakness is particularly significant because declines in this business can outweigh growth in Qualcomm's newer markets. The company is seeing a faster reduction in Apple-related revenue. The company now expects its modem share in upcoming iPhone launches to be materially below its earlier 20% assumption. It forecasts Apple product revenue to decline about 50% sequentially from September to December 2026.
Higher operating expenses are adding to the pressure on profitability. The company is investing heavily in data-center products, AI computing and software. This may bring long-term benefits but increases costs in the near term. Management expects the margins to eventually recover once the pricing actions take effect.
How Are Competitors Faring?
Qualcomm faces competition from Intel Corporation INTC and Advanced Micro Devices AMD in the semiconductor space. At the end of the second quarter of 2026, Intel’s Non-GAAP operating income was $2.77 billion against an operating loss of $0.5 billion in the year-ago quarter, with respective margins of 17.2% and a negative 3.9%. This is primarily backed by strong demand in several segments and cost discipline initiatives. In the second quarter of fiscal 2026, Client Computing and Physical AI Group revenues rose 15% sequentially to $8.9 billion, with AI PC revenues rising 26% sequentially and representing about two-thirds of segment revenues. In the second quarter of fiscal 2026, Data Center and AI revenues increased 24% sequentially and 59% year over year to $6.3 billion, while operating income rose by $1 billion sequentially to $2.5 billion.
AMD’s Operating income jumped 245% to $3.09 billion, while operating margin widened 15 percentage points to 27%. Data Center operating income was $2.1 billion compared with a loss of $155 million in the year-ago quarter, translating into a 31% operating margin. Client and Gaming segment operating income declined 24% year over year to $582 million as higher expenses more than offset the revenue increase. Embedded operating income increased 40% year over year to $386 million. Operating margin improved to 40% from 33%, aided by higher sales and a favorable product mix. Management said embedded x86 products are becoming a meaningful growth driver as hyperscalers and networking customers adopt AMD CPUs for data center control functions.
QCOM’s Price Performance, Valuation and Estimates
Qualcomm shares have gained 11.9% over the past year compared with the industry’s growth of 26.5%.
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Going by the price/earnings ratio, the company's shares currently trade at 18.35 forward earnings, higher than 12.73 for the industry.
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Earnings estimates for fiscal 2026 and 2027 have decreased over the past 60 days.
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Qualcomm currently has a Zacks Rank #5 (Strong 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).
