Qualcomm’s Risks And Opportunities

Mobile chipset major Qualcomm (NASDAQ: QCOM) posted a better-than-expected set of Q4 FY’24 yesterday and guided better-than-expected numbers for the holiday quarter, driving the stock up by about 6% in after-hours trading on Wednesday. While revenue rose 9% year-over-year to $33.19 billion, earnings saw a considerable jump rising to $2.59 per share, up from $1.23 per share in the year-ago period. The smartphone market has picked up a bit this year following a post-Covid-19 lull and Qualcomm in particular is benefiting from a wave of launches of flagship smartphones by Chinese brands.  At its current market price of just under $173, the stock is trading roughly 10% below its fair value of $189 – the Trefis estimate for Qualcomm’s valuation. In this analysis, we take a look at some of the potential opportunities and risks for Qualcomm stock, helping investors decide whether to buy, hold, or sell the stock.  As an aside, here’s an upside scenario on How Tesla Stock Can Get To $1,000 following Trump’s reelection.

The increase in QCOM stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 22% in 2021, -39% in 2022, and 35% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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. So what are some of the risks and upside factors that could drive Qualcomm stock going forward?

Let’s start with the negatives first

Apple’s In-house Modem 

A significant risk to Qualcomm’s revenue lies in Apple’s development of its modem chips, which could eventually replace Qualcomm’s modems in future iPhones. Although Qualcomm has an agreement to supply Apple with chips until at least 2026, Apple’s past setbacks in developing communications chips suggest that any transition will likely be gradual and phased. Although Qualcomm doesn’t break out revenue by customers it is estimated that Apple accounts for over 20% of Qualcomm’s total sales – a sizable chunk of Qualcomm’s revenue. The effect could be even more pronounced on Qualcomm’s margins, as Apple’s devices typically demand cutting-edge technology and higher-end components. Additionally, Qualcomm’s recent 10-K filing noted that Apple has already started using modem chips from its rivals, potentially MediaTek or Samsung, in some of its devices. While this risk has been known for some time, it continues to present a downside to Qualcomm’s financials.

Big China Exposure

Qualcomm has been experiencing stronger demand from China, driven by the rising popularity of premium Android-based devices. The licensing business is also gaining traction in China as Qualcomm signed long-term licensing agreements with Chinese manufacturers Honor and Shenzhen Transsion Holdings. Companies headquartered in China accounted for a massive 46% of Qualcomm’s total revenue last fiscal year. However, this exposure to China comes with significant risks. With Donald Trump elected to the U.S. presidency for a second term, the trade war between the U.S. and China could very well intensify. Trump has previously proposed tariffs of 10% to 20% on most Chinese imports, and over 60% on certain goods. This could directly or indirectly impact companies like Qualcomm that rely heavily on Chinese revenue streams. Additionally, some of the demand Qualcomm is currently seeing from China may be temporary, with Chinese OEMs possibly stockpiling chips in anticipation of future trade tensions under a Trump Administration.

ARM Litigation

Qualcomm is also facing litigation risks due to an ongoing legal dispute with British chip designer Arm, which provides the core architecture for most of Qualcomm’s high-end chips. Arm has accused Qualcomm of illegally using some of its intellectual property and has threatened to revoke access to its architectural designs. To be sure, both companies have strong incentives to settle. Qualcomm relies on Arm’s designs to run its chip business while Arm relies on Qualcomm given that it is one of the largest mobile chipset vendors in the world. The dispute remains a potential headwind for Qualcomm, with the trial set to start in December.

Opportunities

Premiumization of Smartphone Market

Although the smartphone market slowed in 2023 post the Covid-19 pandemic and also due to some economic uncertainty, things have been improving. Research firm IDC estimated that worldwide smartphone shipments could grow by nearly 6% in 2024 to 1.23 billion units. This should benefit Qualcomm’s CDMA Technologies (QCT) segment, which sells application processors, modems, and software for mobile devices and other electronics. Furthermore, there has been a clear trend toward more premium smartphones, particularly in developing markets. This, in turn, is driving demand for higher-end chips, which should help to boost Qualcomm’s margins. The company reported 28% operating margins for its chip division last quarter, a 200 basis point increase over the previous year, and has guided that margins could rise to between 29% and 31% in Q1 FY’25.

Automotive Opportunities

Qualcomm’s automotive business is also seeing significant growth as semiconductors play a larger role in vehicles, driven by trends like electrification and autonomous driving. In the most recent quarter, automotive sales surged 86% to $899 million. Qualcomm has a strong development pipeline with automakers and expects automotive sales to grow by 50% year-over-year in the current quarter. There’s a lot of room for growth as electronics account for a greater mix of vehicle input costs. For example, consulting firm Deloitte estimates that electronics now make up 40% of a new car’s total cost, compared to 20% in 2000 and this trend is only likely to increase going forward. Qualcomm should be well-positioned to benefit from this. The company is on track to exceed $4 billion in automotive revenue in the next year or so. Many leading automakers are adopting Snapdragon Elite automotive platforms for their future software-driven vehicles, including Mercedes-Benz and China’s Li Auto.

PC and AI 

The growing interest in generative artificial intelligence (AI) presents an opportunity for Qualcomm. While the company is seeing higher demand for chipsets that are optimized for AI applications for smartphones, including enhanced voice assistants and image generation, the AI trend is also enabling Qualcomm to expand into the PC market, where vendors are looking to integrate AI capabilities directly into laptops and desktops. For example, in May, Microsoft and other Windows PC makers announced new AI-enabled computers that use Qualcomm’s Snapdragon X Elite and Snapdragon X Plus processors. The X Elite includes an integrated NPU (Neural Processing Unit), which is specifically designed for running machine learning algorithms.  The company says that it has about 58 platforms that are launched or under development, featuring these new chips. With the lines between mobile devices and PCs increasingly blurring and customers getting more serious about battery performance and portability, Qualcomm could stand to benefit. The business is gaining traction. Qualcomm’s Internet of Things segment,  which includes the new PC chips, reported $1.68 billion in revenue over the most recent quarter, up 22% versus last year.

[1] Returns as of 11/7/2024
[2] Cumulative total returns since the end of 2016

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