Qualcomm: Key Implications From Apple’s AI Announcements

Summary:

• Apple Inc. introduced new AI features at its Worldwide Developers Conference.
• Apple’s announcements provide material new information for Qualcomm Incorporated investors.
• In this article, I evaluate what the revelations from Apple may imply for Qualcomm’s artificial intelligence prospects.
• Overall, I maintain a buy rating for Qualcomm stock.

Apple Inc. (AAPL) recently held its Worldwide Developers Conference (“WWDC”), where it showed off new artificial-intelligence-based features coming to the iPhone, iPad, and Mac in the fall (in beta). Although we will have to wait and see how well Apple’s new AI products perform in practice, Apple’s announcements still provide material new information for Qualcomm Incorporated (NASDAQ:QCOM) investors. In this article, I discuss my key takeaways for QCOM stock.

Personalized AI Requires Personal Data

Apple introduced a number of AI features that require AI models to have access to users’ personal data, including emails, messages, calendar events, etc. For instance, Siri will now be able to hold contextual conversations based on information in users’ various apps (e.g., when asked “at what time am I supposed to meet XYZ,” Siri will be able to look through your messages, emails, calendar events, etc. to find your plans). Apple also demoed some other personalized AI features as well, for example to limit interruptions from message notifications to only those requiring immediate attention; or to arrange emails by urgency; or to edit photos. All these features require AI models to access and process your personal data.

Given the large amount of personal data required for some of the new AI features, Apple has focused primarily on AI inference on-device. Unless a task requires the computational power of the cloud, all user data stays on the device (and it appears that Apple will require authorization each time data is sent to the cloud for the remaining tasks).

It seems to me that privacy and security are probably going to be important to quite a few users, and on-device AI inference seems likely to be the way forward for at least some proportion of edge AI workloads. Although on-device inference will not be sufficient for every workload, we can see from Apple’s announcements that at least some AI workloads can be handled on-device.

If on-device inference turns out to be a significant part of how AI develops on the edge, then this would be a very positive development for Qualcomm. Demand for AI features would translate to demand for newer devices with sufficiently powerful hardware to run those features. Qualcomm management has been speaking of the importance of on-device AI for some time now (I have also previously written about the subject). Based on Apple’s revelations, it now seems fairly likely to me that on-device AI will come to represent a significant proportion of consumer AI workloads.

A Smartphone Upgrade Cycle Seems Increasingly Likely

Qualcomm management has also spoken for some time now about the possibility of an AI-driven smartphone upgrade super cycle. Again, I think that Apple’s announcements are a positive sign for Qualcomm in this regard.

It is particularly noteworthy that, as far as smartphones are concerned, Apple’s new AI features will only work on the (current-generation) iPhone 15 Pro or better. This is despite Apple enhancing the performance of its iPhone NPUs (Neural Processing Units) for the last several generations. Most existing iPhones will still not be powerful enough for Apple’s AI features, which suggests that most existing Android phones probably won’t be either.

It follows that most people who want new AI-based features (from Apple or otherwise) will likely have to upgrade their phone. This is excellent news for Qualcomm, and I would say that the odds of a significant AI-driven smartphone upgrade cycle are looking better and better. Of course, we still have to see how well AI-based smartphone features work in practice and how strong demand will be for them. But if Apple’s demos are reasonably accurate, then some of the new AI features do look compelling for users. It seems likely that they will make their way to Android as well, and drive smartphone chip demand for Qualcomm.

If a significant smartphone upgrade cycle takes off, then the result could be quite a lot of growth for Qualcomm, since we have been in a cyclical slump for smartphone chips for some time now. Moreover, as demand for NPU performance increases, it is also possible that the silicon content of smartphones could further increase, generating even more growth for Qualcomm via increased ASPs (average selling prices).

We will have to wait and see how things play out, but it appears that conditions are good for strong smartphone demand over the coming years.

Apple Is Still A Very Formidable Competitor (Of Course)

For the last few quarters, we have been hearing about how Apple missed the boat on generative AI and is significantly behind other major players like Alphabet (GOOG) (GOOGL) and Microsoft (MSFT). But in light of WWDC, we can see that Apple has been hard at work, and is introducing some seemingly impressive AI-based features. I expect there to be some initial kinks that are ironed out over time, but given Apple’s history, I still expect at least some of the new generative AI features to reach a high quality eventually.

Apple’s good showing isn’t surprising, in my opinion. Even though Apple has not been at the forefront of generative AI, they have been pushing AI more broadly for some time. They have previously done so on both the hardware side (NPU performance has been increasing significantly across Apple devices) and the software side (e.g., with the camera, photos, etc.).

Hence, although Qualcomm has gone all in on AI with their latest hardware, I am not sure if they will be to capture significant market share from Apple. Apple has been pushing AI capabilities for some time, and their latest offerings look quite good, so it should still remain well-positioned as far as consumer AI is concerned.

Of course, AI consumer applications are a rapidly evolving area, so there could be more shifts in Apple and Qualcomm’s competitive positions over the next couple of years. This is something on which investors should keep a keen watch.

Conclusion

Overall, I would say that Apple’s latest AI announcements are a positive sign for Qualcomm. Apple’s new AI products provide further evidence that AI will likely become more personalized, which increases the value of on-device AI inference. In addition, demand for AI features seems increasingly likely to generate good demand for smartphones (and other edge devices). As such, even though I don’t currently expect Qualcomm to wrest market share from Apple, conditions are still good for Qualcomm to see good growth in smartphone revenue.

I last rated Qualcomm a buy in January based on its compelling AI prospects. The share price is about 40% higher now. However, Qualcomm’s earnings have grown a solid amount since then, and its AI prospects also seem significantly stronger today in light of the factors I have discussed. On balance, to me, it makes sense to maintain a Buy rating for Qualcomm stock.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of QCOM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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