Qualcomm (QCOM)
Current Price (as of 3/15/2024): $166.87
Almost all Americans own a mobile phone (97%), meaning you've probably used Qualcomm's technologies to power your device. Qualcomm primarily creates chips and software for mobile devices. However, as the smartphone market matures, the company aims to continue growing by selling integrated circuit products (chips) for automobiles and PCs. Qualcomm is also at the forefront of Artificial Intelligence, having developed two new chips capable of running powerful AI software offline, without an internet connection.
Qualcomm operates through three main segments: Qualcomm CDMA Technologies (QCT) semiconductor business (accounting for 85% of total revenue), Qualcomm Technology Licensing (QTL) business (15% of total revenue), and Qualcomm Strategic Initiatives (QSI).
QCT provides chips and system software for mobile devices, automobiles, PCs, and IoT (Internet of Things) technologies. QTL grants licenses for patented technologies, while QSI focuses on making strategic investments in innovative technologies, along with some investments in marketable equity securities and convertible debt instruments.
Positive Outlooks
- QCOM's competitive edge arises from its position as the foremost provider of chips tailored for wireless phones and its ownership of crucial patents vital for operating 4G and 5G networks. With most mobile devices incorporating Qualcomm's technology, its clientele boasts industry giants such as Samsung and Apple. Moreover, QCOM is poised to allocate a portion of its royalties towards investing in 6G technology, ensuring a continued flow of royalties for the next two decades. Anticipated to debut in 2030, the advent of 6G promises to sustain Qualcomm's revenue streams.
- QCOM is boosting revenues beyond the smartphone market, with its automotive segment posting year-over-year revenue growth of 31% in Q1 of FY2024. Qualcomm offers chips for automobile systems, specifically its Snapdragon Ride Platform, which is building momentum in advanced driver assistance systems (ADAS), autonomous driving, and automobile infotainment systems.
- Generative AI capabilities on smartphones and PCs present an opportunity for QCOM’s new chips, which include Snapdragon Series 8 Gen 3 for high-end Android phones and the Elite X for PCs. Snapdragon Series 8 Gen 3 can perform AI tasks much faster than last year’s processor, speeding up the time it takes to generate an image from text commands, which is down from 15 seconds to just half a second. QCOM’s Elite X chip is said to offer better performance than Apple’s M2 Max chip while using less power.
Negative Outlooks
- With little to no switching costs, fierce competition in the smartphone chipset market may dampen QCOM’s profits in the future. Intel, QCOM’s biggest competitor, is teaming up with Arm to create SoCs (systems on chips) for mobile phones. Furthermore, low-cost chip manufacturers like MediaTek are aiming to capture market share in the low to medium-priced phone segments. Unfortunately, Samsung may eventually phase out QCOM’s Snapdragon chips altogether and opt for its own Exynos processors for all models globally. Lastly, although Apple has extended its 5G modem agreement with QCOM through March 2027, it plans to use its own broadband chips thereafter.
- QCOM is grappling with global regulatory scrutiny regarding the fairness of its licensing model, which revolves around collecting royalties calculated as a percentage of the total sales price of each smartphone sold.
Financial Results and Outlook
In Q1 of fiscal 2024, QCOM delivered revenues of $9.935 billion and GAAP earnings per share of $2.46, which were both above the high end of guidance ($9.9B and $2.02). Revenues from QCOM’s chipset business of $8.4 billion, reflected healthy Android demand and strong momentum in its automotive segment, which was up 31% year-over-year. While the IoT (Internet of Things) only accounts for 13% of QCT revenue, it was down 32% for the quarter, which management attributed to industry-wide challenges on all fronts including the consumer, industrial, and edge networking sides. Nonetheless, management believes that the IoT revenue stream bottomed in the first quarter and are guiding the second quarter to be up to mid to high-single digits.
QCOM’s Licensing business revenues declined 4.2% in Q1FY2024 to $1.460 billion from $1.524 billion in the prior year’s quarter, but was above the midpoint of guidance at $1.4 billion. Lastly, Q2FY24 guidance was uninspiring, with management predicting flat smartphone demand for both the 2nd and 3rd quarters due to low product launches from its customers. On a positive note, Q2 earnings per share figures should come in 2% to 11% higher than the same quarter from the previous year.
