AI And Auto Business In Focus As Qualcomm Publishes Q3 Earnings

Mobile chipset major Qualcomm (NASDAQ: QCOM) is poised to publish its Q3 FY’24 results later this month.  The stock has risen by a solid 45% year-to-date, outperforming semiconductor peer Intel (NASDAQ:INTC), which has plummeted by about 30% over the same period. Now we expect Qualcomm’s earnings for the quarter to come in at $2.25 per share, up about 20% compared to last year, while revenues are likely to stand at $9.25 billion, slightly ahead of consensus estimates and about 9% higher compared to last year. There have been several factors driving the recent gains for the company, including a recovery in the smartphone market and optimism that the generative AI trend will help chipset sales. See our analysis of Qualcomm Earnings Preview for a closer look at the trends driving Qualcomm’s earnings.

While the smartphone market saw a lull in 2023, as the Covid-19 pandemic eased and economic uncertainty weighed on consumer spending, things have been looking up of late. Per Counterpoint, worldwide smartphone shipments grew 6% year on year over the second quarter of 2024. This should benefit Qualcomm’s CDMA Technologies (QCT) segment, which sells application processors, modems, and software for mobile devices, networking equipment, and consumer electronics.  Moreover, Qualcomm is also seeing higher demand from China, where local OEMs have increased their uptake by over 40% compared to last year, as demand for premium Android devices grows at the expense of Apple’s iPhone. About 40% of the company’s sales were made to companies headquartered in China and Hong Kong over the last quarter. The surging interest in generative artificial intelligence is also benefiting Qualcomm. The company is seeing higher demand for high-end chipsets such as the Snapdragon 8 Gen 3 that are optimized for AI, including enhancing voice assistants and generating images. Qualcomm’s chips also appear to be gaining traction in the PC market, as vendors look to deploy AI natively into computers with its Snapdragon X chips. A few months ago, Microsoft and other Windows PC players announced new computers with artificial intelligence features using these new processors. We will be looking for updates on the same when the company publishes earnings.

Qualcomm’s automotive business is also faring well as semiconductors play a much bigger role in the transportation industry with trends such as electrification and autonomous driving gathering pace. Semiconductor content in vehicles has also been soaring. Per Deloitte, electronics account for 40% of a new vehicle’s total cost, up from under 20% in 2000. The number is likely to grow to over 45% by the end of this decade. Qualcomm’s automotive revenues rose by 35% year-over-year in Q2 FY’24 to $603 million. Qualcomm indicates that it is gaining market share, remaining on track for over $4 billion in automotive revenue by FY’26. It is likely that the growth will continue, although the recent slowdown in car sales and a lull in the EV industry could impact the segment in the interim.

Now the optimism surrounding artificial intelligence and Qualcomm’s automotive business has driven its stock up 40% from levels of $150 in early January 2021 to around $210, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in QCOM stock has been far from consistent. Returns for the stock were 20% in 2021, -40% in 2022, and 32% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that QCOM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could QCOM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Qualcomm stock trades at just about $204 per share, or about 21x consensus FY’24 earnings. Although this isn’t a high multiple, there are some concerns. Competition in the company’s core mobile chipset space is also mounting. For instance, China’s Huawei’s new smartphones will feature its proprietary Kirin processors going forward, leading to lower sales for Qualcomm. There is also speculation that Samsung could  drop Qualcomm processors on its upcoming flagship in favor of its own Exynos line of chips.  We have a $189 price estimate for Qualcomm, which is 9% below the current market price of $210. See our analysis of Qualcomm Valuation: Expensive Or Cheap? for more details on what’s driving our price estimate for the stock.