• Qualcomm is diversifying beyond mobile handsets into automotive, IoT, and PCs, driven by edge-AI applications, boosting growth and reducing reliance on the mature mobile market.
• The company’s Snapdragon platforms are well-positioned for edge-AI, with significant traction in automotive and IoT, and promising new Snapdragon X processors for PCs.
• Despite strong financials and growth potential, Qualcomm faces considerable risks from its high dependence on the Chinese market and potential trade tensions.
• While the stock is attractively priced and benefits from AI-driven tailwinds, the significant China-related risks make a full entry currently unwarranted.

Qualcomm (NASDAQ:QCOM) focuses on developing and commercializing foundational technologies including 4G, and 5G wireless connectivity, high-performance computing (mobile and PC), and on-device AI.

The company leads in developing and licensing CDMA and OFDMA-based technologies, playing a significant role

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• The modem war between Apple and Qualcomm is heating up.
• Apple aims to replace Qualcomm by 2027.
• Qualcomm will come out strong regardless of Apple’s success.
• Apple remains committed to an ambitious vertical integration plan, which I remain skeptical about.

The battle between Apple Inc. (NASDAQ:AAPL) and QUALCOMM Incorporated (NASDAQ:QCOM) has reignited once again as the former seems poised to remove its reliance finally on the latter’s modem technology. This moment has been a long time in the making and comes after years and years of research, development, delays, and throwing lots of money at the problem. However, I remain skeptical of Apple’s ability to match Qualcomm’s performance and its ability to adhere to the reported timeline.

Strap in folks, this is a long one.

The Great Modem War: How Did We Get Here?

Apple and Qualcomm have been at odds for some time (I’m putting it mildly) mostly regarding disputes over smartphone patents and the licensing fees for using intellectual property. These two companies sued and countersued each other over so many patents in so many different countries, that they probably could have kept entire law firms afloat. To put this history briefly: Qualcomm initially sued Apple in 2017 for infringing on its patents, Apple countersued claiming the patents were invalid, and the companies settled in 2019 with Apple paying billions of dollars for a license to use thousands of Qualcomm’s patents.

However, the agreement allowed the patent dispute to proceed, which led to a court upholding the patents and ruling against Apple in 2020, upon appeal in 2021, and then upon further appeal in 2022. Amidst this back and forth, Apple had already begun working in 2018 to develop an in-house modem to cut Qualcomm out of the equation and become as self-reliant and as vertically integrated as possible. Phasing out Intel Corporation (INTC) processors in favor of Apple silicon in 2020 for its Mac laptops is a prime example of such efforts. And yet, while Apple’s development of in-house processors has been wildly successful, the endeavor to challenge Qualcomm’s modem dominance hasn’t seen nearly the same success.

After purchasing Intel’s modem business for $1 billion in 2019 and hiring additional engineering muscle, the original plan was to launch an iPhone model with an Apple-designed modem by somewhere around 2024. However, the initiative ran into delays as attempts to add new features to Intel’s apparently subpar modem software ground progress to a halt, necessitating a full re-work of the codebase. A quote from the original Bloomberg report sums it up nicely:

Why we thought we could take a failed project from Intel and somehow succeed is a mystery.

There was speculation that even 2025 might be too ambitious a target for an Apple-branded modem release after the company extended its supplier agreement with Qualcomm to March 2027. However, it appears that the moment of truth is finally on the horizon and that Apple will reveal its modem in the spring of 2025. Which brings us to the present day.

Will Apple end up triumphant or does Qualcomm have some more cards left to play? Let’s get to the analysis!

Can’t Get Rid Of Me That Easily

Now, some readers might be surprised by the difficulties Apple has faced in producing even a serviceable modem after so many years. The company was able to master processors in an impressively short timeframe, why not modems?

The answer to this is multi-faceted and much of the details aren’t publicly available, but we can make some educated guesses.

First, while processors are technically more complex, modems are complex in a different way. They need to work in all different types of conditions, connect with hundreds of cellular operators around the world, work with multiple different global standards (5G, 4G, etc.) and be fast, small, and energy-efficient enough to fit in a device as small as your hand. Building processors isn’t easy of course, but building a cutting-edge modem that can satisfy all of these requirements is perhaps a more specialized task. One that Apple seems to have underestimated. Qualcomm has a decades-long advantage in real-world testing and iterating on its modem design that Apple simply doesn’t have, and replicating that has proven more difficult than expected.

Second, it seems there has almost certainly been an element of Intel’s acquired modem division poisoning the well for Apple’s engineering efforts. Instead of building from a clean foundation to create a modem that could support all the various features a cutting-edge product would offer, Apple went for a more Frankenstein-esque approach of attaching new software limbs onto a fragile body of a codebase that wasn’t designed for it. There’s a reason that, around the time when Intel sold this division to Apple, Qualcomm modems were about 30% faster! Apple wasted valuable time trying to make a better version of Intel’s modem when, perhaps in hindsight, it should simply have used Intel’s IP and engineers to start fresh.

Lastly, Qualcomm isn’t just better at making modems, it holds many of the patents that are necessary to create the chips. Apple has a license that covers much of this IP, but the company still has to be careful to avoid infringing on patents wherever possible since Qualcomm has proven itself to be prodigiously litigious, and it’d probably like nothing more than to derail Apple’s modem plans.

And yet, despite all these speed bumps, Apple is poised to finally release its first modem with Apple inside. The new expected roadmap comes from another recent Bloomberg report, which provides some interesting details on the roll-out.

As expected, Apple is targeting the iPhone SE line of smartphones as the first devices to include an in-house modem. The iPhone SE 4 is slated for release in early 2025, which matches up with the modem release timeline. The logic here is fairly straightforward: the iPhone SE is Apple’s budget option and buyers won’t expect bleeding-edge performance or features on such devices, which makes it a good sandbox to test drive the modem and put it through more involved, real-world testing. The assumption goes: if the phone drops a call here or there, or it gets worse battery life than it would with a Qualcomm modem, users will get annoyed, but it won’t be the end of the world — if they even notice at all.

While this is likely the optimal strategy, it’s still not without risk. Of components in a smartphone that are absolutely essential and likely to cause issues a user will notice, the modem is near the top of the list. Modem issues plagued the first iterations of Alphabet Inc.’s (GOOG), (GOOGL) Pixel line of smartphones, and can be a frustrating enough issue to incense users to switch.

The Apple modem will also likely lack features that a Qualcomm modem provides, which are a bit technical for the scope of this article, but suffice it to say Apple has a lot of work to do to reach its other goals. Namely, to release a second-generation modem for a mid-tier line of iPhones in 2026 and then a third generation in 2027 that will match or surpass Qualcomm and be included in the company’s flagship smartphones. Here’s where my skepticism comes in.

Assuming the iPhone SE 4 launches with an Apple modem in 2025, it will have taken the company around seven years from starting the initiative to create an in-house modem to launching an option that’s good enough for its budget offering. Yet somehow it now expects to catch or surpass Qualcomm, which has been the undisputed king of modems nearly forever, in just two years? I don’t see it. Building a good enough modem isn’t really all that difficult, relatively speaking. MediaTek, Samsung, Huawei, and others have done it, but Qualcomm is consistently ahead of the pack and the sole resident of the top tier.

All this to say, it could take quite a while for Apple to create a modem that offers the level of performance expected from its high-end iPhone. As an example, Samsung has made its own modems for a while and includes them in many of its smartphone offerings, but still uses Qualcomm’s Snapdragon system-on-a-chip (“SoC”), which includes other processors along with the modem, for the premium Galaxy S series in its all-important home market of South Korea (and in the US for patent reasons). Outside this market, Samsung mostly sells its Galaxy S smartphones with its in-house Exynos SoC, but the company is likely switching to Snapdragon in all of its flagship smartphones starting with the S25.

When top performance is a must, which it is for a device like the high-end iPhone, Qualcomm is the best game in town. Catching up to that level of expertise will be substantially more difficult than creating this first-generation Apple modem. Which, again, took seven years.

There’s a quote I’ve heard referenced a couple of times during my career as a software engineer that illustrates this concept well, in my opinion:

The first 90 percent of the code accounts for the first 90 percent of the development time. The remaining 10 percent of the code accounts for the other 90 percent of the development time.

— Tom Cargill, Bell Labs

Getting from a good modem to a great modem to a best-in-class modem will be an unimaginably difficult task, one that I cannot see Apple accomplishing by 2027. However, there is a scenario where Apple takes the leap for its flagship iPhone regardless of inferior modem performance.

The current models use an Apple processor and a separate Qualcomm modem, which takes up space and requires external interconnects between components because Qualcomm doesn’t allow customers to include its modems on SoCs. This gives Snapdragon devices a bit of a boost in technical comparisons to the iPhone. Apple’s ultimate goal is to create an iPhone with an SoC that includes its processor and modem on a single substrate, which saves space, provides a boost to energy efficiency, and opens up other feature possibilities. So even if Apple’s high-end modem isn’t as good as Qualcomm’s for a long while, the company might still decide that the benefits of having a completely Apple-built SoC that combines its processor and modem outweigh the potential downsides of dropping Qualcomm and the resulting downgrade in modem performance.

QCOM

Well, we’ve finally gotten to the point where we discuss investment implications — after all, none of this matters if it doesn’t affect the almighty stock price. Let’s start with Qualcomm.

Apple dependency has been a fear for investors regarding QCOM for quite a while, as estimates put annual iPhone-derived revenue at around 20% of Qualcomm’s total. But while Apple’s move will have an undeniable negative effect on Qualcomm’s top line results, the latter has made great strides in recent years to diversify its revenue streams and prepare for the inevitable breakup.

Non-handset revenue was a record percentage of total revenue in FY2024, led by a 55% increase YoY in automotive revenue as the company has positioned itself as a market leader in vehicle automation. This is a fast-growing opportunity that is estimated to already have a $35 billion total addressable market. Revenue from IoT sources saw a YoY decline in FY2024 due to some oversupply issues, but still came in at $5.4 billion, or 16% of the total, and management expects this to improve in FY2025 as inventory clears.

Even in a worst-case scenario where Apple phases out Qualcomm modems by 2027, I think this diversification positions the stock well for outperformance. Even more important is, Qualcomm’s ace in the hole: the company holds the necessary patents to build a 5G-enabled modem so the license agreement between Apple and Qualcomm that allows the former to build its own modems still benefits the latter to the tune of billions of dollars. That licensing deal expires in 2027, and it’ll be interesting to see if another dispute arises, but either way, Qualcomm wins.

From a valuation standpoint, QCOM is one of the few tech stocks not trading at a lofty premium:

Part of this is likely due to the Apple boogeyman — the one thing the market hates most is uncertainty. I view this as an opportunity for savvy investors to jump on a great company at a great price. It will likely take years for Apple to truly phase Qualcomm modems out of its devices, and, when that day comes, the licensing revenue will generate plenty of dollar bills with which QCOM shareholders can wipe their tears. Samsung switching to Snapdragon for all of its Galaxy S smartphones, will soften the blow as well.

In addition to solid growth potential, the dividend is fairly high for a name in this space and the payout ratio indicates that it’s as safe as can be with plenty of room to expand going forward:

For further reading on my QCOM bull case, you can read my previous article on the stock here.

Let’s move on to Apple!

AAPL

So I think it’s apparent that Apple is investing heavily in a strategy that will, in theory, allow them to manufacture all or most of the semiconductor content in its devices. Qualcomm’s modem is in its sights, of course, but Apple also wants to replace Broadcom Inc.’s (AVGO) Wi-Fi + Bluetooth chip, and eventually radiofrequency components provided by Broadcom, Skyworks Solutions, Inc. (SWKS), and Qorvo, Inc. (QRVO).

This provides potential benefits, which I touched on earlier, in the form of cost savings, power efficiencies, enabling new features, shrinking the space that chips occupy, and just an increase in general control over the manufacturing of the device. However, it also introduces potential downsides.

If this strategy is executed perfectly, I agree that it could be a sound move from a profit-making perspective. But things go wrong in semi manufacturing all the time, and the more vertically integrated a company becomes, the more reliant it is on all of its interconnected functions to achieve a standard of excellence at the same time. The way it’s shaping up, Apple has to retain teams of engineers that will create the most cutting-edge CPU, modem, RF filters, Wi-Fi + Bluetooth chips, and whatever else the company decides to make internally, in relative perpetuity. If any of these components fail to achieve the technological leap that each successive generation typically requires, Apple will be stuck with a device that perhaps doesn’t perform as well as competitors. Over time, this could impact brand image and hurt sales.

In fact, this situation has shades of what happened and is currently happening at Intel. Intel has a design division that comes up with the specs for a given processor, and it has a foundry that manufactures that processor. This system works great as long as both the design and foundry continue to perform to the same standard, but can implode if either struggle. As many of you are likely aware, Intel’s foundry has fallen behind in recent years while Taiwan Semiconductor Manufacturing Company Limited (TSM) has leapfrogged ahead, which has allowed the likes of Advanced Micro Devices, Inc. (AMD) to manufacture chips at TSMC that outperform Intel’s. One problem becomes two.

Now hold on, before anyone jumps down my throat, I’m aware that these situations are not completely analogous. But I do think it’s an illustration of how quickly vertical integration can go from a blessing to a curse. For Apple, the more integrated its components become, the more difficult it becomes to go to outside suppliers if an internally designed component isn’t up to snuff for whatever reason. It’d be a tall order, and perhaps borderline impossible, to unravel a SoC and add an outside component to it, so Apple would be in a tough spot.

I think Apple has realized that the smartphone business, while insanely profitable, will not sustain growth. This move to bring all device components under the Apple umbrella is likely a play to increase revenue and profitability in an attempt to stave off effects from a stagnation in unit sales, which could work in the short-term but, as I discussed, could leave the company exposed in the long term.

Due to this and due to the stock’s fairly lofty valuation, I don’t think AAPL represents any screaming value worthy of investor dollars at the moment:

For a company with so much cash on hand and that generates more than $100 billion in free cash flow every year, it’s odd it doesn’t return this capital to shareholders more directly. The company has embarked on massive share buybacks, which I’ve never really been a fan of, instead of simply raising the dividend more. While share repurchase programs can have their benefits, in Apple’s case, it appears to mostly be financial engineering to continue increasing EPS even as net income growth has stalled.

The dividend yield and payout ratio demonstrate there is plenty of room to go this route, should management decide to take that path:

Or maybe even spend it on some significant acquisition that could boost results or bolster existing product lines. Anything would be more useful than share buybacks, in my opinion, and until the company shows a willingness to change course I have a hard time seeing the stock as a Buy, especially with its current valuation.

Investor Takeaway

Apple and Qualcomm’s war over modems in the iPhone seems to be ramping up and perhaps heading towards a conclusion. I think Apple has a lot more work to do before it can claim parity with Qualcomm’s premium modem offering, which could leave the two attached for a while longer. Apple could even speed up its timeline and bite the bullet on worse modem performance in order to make an all-in-one SoC that includes the processor and modem (and Wi-Fi + Bluetooth chip if that one is finished in time), which is the company’s ultimate goal.

I remain skeptical of Apple’s ability to make a high-performing modem by 2027 and also of the company’s general strategy of making all these components internally. In addition, operating results and unit sales are stagnating, the capital return to shareholders remains lacking, and the stock’s valuation remains elevated. In light of these factors, I am rating AAPL a Hold.

While Qualcomm might soon lose Apple’s modem revenue, it will continue to earn licensing revenue from these components and has completed sufficient diversification to allay any Apple dependency issues, in my opinion. In fact, I think a de-coupling from Apple will reduce market uncertainty and could lead to valuation multiple expansion. Qualcomm has a significant foothold in the automotive space that will contribute to growth and the company continues to rake in cash and raise its dividend. I am re-iterating a Buy on QCOM.

You made it to the end! If you made it this far without skipping or skimming, you have my thanks. And if you did skim or skip, you still have my thanks, just a little less of it.

Thanks for reading!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post How Apple Is Losing To Qualcomm In The Great Modem War appeared first on Up2info.com.

• Qualcomm’s recent underperformance seems to be temporary; strong financials and valuation provide a margin of safety and excellent upside for future business expansion.
• Q4 FY2024 saw robust revenue and EPS growth, driven by QCT segment’s success in handsets, automotive, and IoT devices.
• Qualcomm’s strategic diversification into AI, automotive, and IoT, along with strong partnerships, positions it well for future growth despite cyclical industry risks.
• I believe the market has been slow to reflect QCOM’s true EPS growth potential in its current stock price. I think QCOM seems setting up for a jump-up.

My Thesis

The recent underperformance by one of the largest companies in the semiconductor sector – QUALCOMM Incorporated (NASDAQ:QCOM) – seems to be a temporary phenomenon. I think that the stock’s negative momentum should soon be reversed, as a strong margin of safety has developed in the firm’s valuation. Additionally, the latest financials and prospects suggest excellent upside for future business expansion.

My Reasoning

Qualcomm Incorporated posted strong performance in its fourth fiscal quarter and full fiscal 2024, reporting solid growth in its key segments driven by robust demand and strategic diversification activities. It appears Qualcomm’s journey from a wireless communications provider to a connected computing leader for the AI frontier is paying off, both financially and in its operational performance. As of note, Qualcomm churned out non-GAAP revenues of ~$10.2 billion during fiscal Q4, an increase of 19% compared to the same period last year. That growth was driven by the QCT (Qualcomm CDMA Technologies) business, which generated ~$8.7 billion in revenue, an 18% YoY increase.

As a result, QCOM’s consolidated non-GAAP EPS came in at $2.69, an increase of 33% year over year. The revenue and EPS figures were both above and beyond Qualcomm’s expectations and the market consensus, fueling further Q1 FY2025 earnings estimates revisions to the upside:

QCT products – including handsets, automobiles, and IoT devices – experienced significant growth. In particular, the handset revenue jumped by 12% YoY to $6.1 billion, “driven by the introduction of the Snapdragon 8 Elite platform”, which is once again the performance leader in Android. But it was the auto industry that came out on top, growing revenue by 68% YoY to $899 million coming from rising demand for leading-edge automotive chips as Qualcomm’s Snapdragon Cockpit Elite and Snapdragon Ride Elite platforms become popular with automotive OEMs such as Li Auto (LI) and Mercedes-Benz (OTCPK:MBGAF), the management commented.

Qualcomm’s IoT business also saw huge growth, driving revenue up 24% QoQ being fueled by “new product launches and continued normalization of channel inventory.” The company’s strategic move into AI-based edge computing and industrial IoT solutions is clearly meeting the market needs as far as I can see, following the launch of the Qualcomm IQ Series and the Qualcomm IoT Solutions Framework.

The QTL (Qualcomm Technology Licensing) unit also did very well, seeing a 21% growth in revenue to $1.5 billion, reflecting the tremendous appetite for Qualcomm’s patented tech across multiple verticals as Qualcomm was able to win multiple licensing renewals over the course of the year. So as a result, QTL’s EBT margin of 74% surpassed internal expectations.

On the balance sheet side, we see ~$13.3 billion in short-term liquidity, 17.4% more than last year. They achieved an all-time free cash flow of ~$11.2 billion in fiscal 2024, so it has helped Qualcomm return ~$2.2 billion to shareholders during Q4, with $1.3 billion spent on stock repurchases and $947 million in dividends, which seems like a wise capital allocation management. In addition, Qualcomm announced a $15 billion stock buyback plan – that’s about 8-9% of the whole market cap.

Leaning on stronger-than-expected Q4 data and a healthy balance sheet, Qualcomm expects $10.5 billion to $11.3 billion in revenue in Q1 FY2025, slightly above analysts’ previous estimates. The company is projecting that its QCT segment will remain robust, and handset revenues are projected to increase by a mid-single-digit percentage over the forecast period. Meanwhile, QCOM forecasts QCT IoT revenue to grow over 20% YoY with consumer, industrial, and networking growth. I believe Qualcomm’s strategic alliances with partners such as Meta Platforms (META), Amazon (AMZN), and Microsoft (MSFT) further strengthen its position in the AI-based edge computing space and provide significant opportunities for future growth.

That’s why analysts anticipate that, despite the cyclical nature of the semiconductor industry, QCOM will rapidly increase its EPS in the next few years at least. According to the current consensus data, over the next 5 forecasted years, its EPS is expected to grow annually by 8.15% (CAGR), which is quite significant for a large corporation:

At the same time, QCOM has beaten Wall Street consensus estimates in all of the 8 years (the EPS surprise, for example, ranges from 0.15% to 7.7%):

My bullish thesis is actually quite straightforward. After EPS fell in 2023, it began to show signs of growth in 2024, initially driving strong stock growth before a decline from $230 to $160 (this year). Given the current EPS forecasts, the market should logically gradually reassess its sentiment on QCOM. When considering the stock market and individual companies, they often serve as predictive indicators of economic conditions and business performance in particular. You know, stock prices are leading indicators from a financial theory perspective. So if the current EPS consensus is close to being accurate and QCOM continues to meet these forecasts, its stock should eventually reflect this expectation. Also, historically speaking, the 1st calendar quarters are quite positive for QCOM stock’s price dynamic, as it has been over the past 15 years, providing a favorable backdrop for QCOM to begin its recovery shortly:

However, seasonality and the projected increase in EPS aren’t enough to establish a sufficient margin of safety for the stock, nor do they provide a clear upside for growth. Fortunately, in the case of QCOM, its valuation seems to be significantly lower compared to the median values of the IT sector:

Yes, the PEG ratio is a major outlier in the above list of multiples, but take a look at the forwarding EV/EBITDA or P/E ratios – they’re 30-47% below the median of the sector.

Again, we can’t ignore the impact of cyclicality, so over the next few years, it’s quite possible that the PEG ratio could easily exceed 1-2x. I think this doesn’t necessarily mean the stock becomes more expensive because the business itself continues to generate substantial profits/FCF and invests heavily in buybacks and dividends, maintaining its valuation premium due to its broad and difficult-to-replicate business moat.

According to Morningstar’s valuation models (proprietary source, December 2024), QCOM’s stock is trading at a 12-13% discount to its fair intrinsic value per share. This suggests that the recent dip in the quotes may be largely unrelated to changes in the company’s intrinsic value.

For all these reasons, I believe that QCOM deserves a “Buy” rating today. As I said earlier, I expect the stock price to jump soon, triggered by a likely shift in market sentiment towards a recovery in QCOM’s earnings in FY2025-26.

Risks To My Thesis

Of course, there are some risks that I consider very important to consider before making any investment decision.

First, despite the stunning revenue and earnings growth in Q4 FY2024, the semiconductor market is always cyclical and demand may fluctuate. It’s unlikely that growth in Qualcomm’s primary verticals (handsets and automotive) will be sustainable if global macro conditions worsen or competition intensifies. The smartphone market, for example, is already maturing and its growth rates may drop significantly next year – this may hamper Qualcomm’s ability to continue along its current revenue-growth path.

Second, QCOM derives a big chunk of its revenue from Apple (AAPL), which poses a challenge because the computer giant designs its own modem chips. Even with Qualcomm’s contracts with Apple expiring in 2026, a change in Apple’s direction will likely have huge consequences for Qualcomm’s revenue base. Moreover, Qualcomm’s dependence on China – which accounts for almost half of its revenues – might be affected by geopolitical tensions and trade barriers. Increased tariffs or regulatory hurdles could tangle supply chains and suppress demand from Chinese manufacturers, negatively impacting Qualcomm’s balance sheet.

Third, though recent stock buybacks and cash flows are a testament to smart capital management, they may not be sufficient to secure an adequate buffer against volatility. The valuation ratios imply that the stock is trading at a discount to its peers, but this could indicate uncertainty about the prospects for growth rather than a potential upside.

Your Takeaway

Despite the above risks, I think Qualcomm’s latest earnings portrayed a positive outlook on future financials and operational growth. Through strong revenue and profit growth in all its key businesses, a strong balance sheet, and proactive shareholder return measures, Qualcomm seems to be well-positioned to continue to dominate the semis market. Their focus on diversification and innovation in high-growth markets such as automotive and AI-based processors should ensure future sustained growth and make Qualcomm a compelling investment for the medium term.

Analyzing the past months’ patterns, I believe the market has been slow to reflect QCOM’s true EPS growth potential in its current stock price. This potential, which we should see unfold over the next two years, is likely to be priced in shortly, in my opinion. I think QCOM seems setting up for a jump-up.

Good luck with your investments!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in QCOM over the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Qualcomm Stock Seems To Be Setting Up For A Big Jump appeared first on Up2info.com.

• Qualcomm, a global semiconductor company, is poised for growth with strong revenue from wireless connectivity and emerging technologies like AI, VR, and autonomous systems.
• Despite fluctuations, Qualcomm has shown solid growth, with a CAGR of 3.93% in revenue and 6.79% in EPS over the last decade.
• Diversification into IoT and Automotive segments is expected to drive long-term growth, with high revenue projections for both sectors by fiscal 2029.
• Qualcomm’s intrinsic value suggests it is slightly undervalued, making it a cautious “Buy” with potential for future growth despite some risks.

In the last few years, it was rather an exception for me to cover a business I had not previously written about. But there are companies and stocks I find interesting, and that deserve a closer look. I have already written about several semiconductor companies in the past – including Intel Corporation (INTC), NVIDIA Corporation (NVDA) and Skyworks Solutions, Inc. (SWKS) – and in the following article I will cover Qualcomm Incorporation (NASDAQ:QCOM) for the first time.

Semiconductor companies are not really fitting the companies I am usually searching for. I like to invest in companies that are growing at a stable pace and with high levels of consistency and have a wide economic moat around its business. And semiconductors are not really fitting that description. However, when assuming that the next decades are characterized by an AI revolution and the need for semiconductors, these companies are worth a closer look.

In the following article, I will follow my template I often use when covering a business for the first time. Not only will we provide a short description of the business, but especially focus on the question if the company has a wide economic moat around its business. Additionally, we will also focus on the question if and how Qualcomm can grow in the years to come and of course we will calculate an intrinsic value for the stock to determine if it is a good investment at this point.

Business Description

(As always when covering a business for the first time, I offer a small business description, but you can skip the next paragraph if you are already familiar with the business)

Qualcomm is a global semiconductor company and especially focused on wireless connectivity – including 3G, 4G and 5G wireless connectivity. Of course, it is also focused on the emerging 6G standards. The company, which was founded in 1985 and is headquartered in San Diego, has about 50,000 employees and is innovative in areas like artificial intelligence, virtual and augmented reality and autonomous systems. The company is operating a dual business model combining chip manufacturing on the one side and technology licensing on the other side.

And in fiscal 2024, Qualcomm was once again generating the biggest part of revenue from Equipment and Services, which generated $32,791 million in revenue (resulting in 9.2% year-over-year growth). Licensing generated $6,171 million in revenue and grew 6.5% compared to fiscal 2023. Overall, revenue increased from $35,820 million in fiscal 2023 to $38,962 million in fiscal 2024 – resulting in 8.8% year-over-year top line growth. Operating income increased even 29.3% year-over-year from $7,788 million in fiscal 2023 to $10,071 million in fiscal 2024. And finally, diluted net income per share increased from $6.42 in the previous year to $9.09 in fiscal 2024 – resulting in a bottom-line growth of 41.6% year-over-year growth.

But to get a feeling for the business, we cannot only look at the last fiscal year (although results were good), we have to look at longer timeframes. And during the last Investor Day, management was pointing out the strong growth in the last five years.

Clearly, Qualcomm is growing with a solid pace, but when looking at the last few decades, we also see fluctuations. Not only earnings per share and free cash flow are fluctuating (which is often the case), but also revenue is not as stable as it could be. But overall, we see growth over the last few decades and revenue increased with a CAGR of 3.93% in the last ten years, while earnings per share increased with a CAGR of 6.79% in the last ten years.

When looking at segment results, Qualcomm’s revenue is stemming especially from two different segments. On the one side we have Qualcomm CDMA Technologies (QCT), which generated $33,196 million in revenue and grew 9.3% year-over-year. Earnings before taxes for the segment increased 20.2% year-over-year to $9,527 million. On the other side we find Qualcomm Technology Licensing (QTL) as second segment, which generated $5,572 million in revenue – 5.0% more than in the previous year. Earnings before taxes increased 11.0% YoY to $4,027 million.

Growth

And while the past is telling us a lot about a business and how it performed (and can perform in the future), we also have to look at the future and what growth rates we can expect. We could start by looking at the company’s guidance for Q1/25 and management is expecting revenue to be in a range of $10.5 billion and $11.3 billion resulting in about 5.5% to 13.5% top-line growth. And non-GAAP diluted earnings per share are expected to be between $2.85 and $3.05 resulting in 16% to 24%.

Of course, looking at one simple quarter is not enough, and instead we can look at analysts’ estimates for the years to come. Between fiscal 2024 and fiscal 2029, analysts are expecting earnings per share to grow with a CAGR of 10.15%.

When asking the question of how Qualcomm might achieve these growth rates in the years to come, one pillar of Qualcomm’s strategy is to diversify. The Internet of Things as well as Automotive are expected to grow at a high pace in the years to come and drive long-term organic revenue growth. And while revenue from Automotive was growing 55% in fiscal year 2024 (and therefore one of the drivers of growth), revenue from Internet of Things declined 9% year-over-year.

But over the next five or six years, Qualcomm is expecting revenue from IoT and Automotive to reach 50% of revenue (compared to about one fourth of revenue right now).

For the Automotive segment, management has high growth expectations. In fiscal 2024, Automotive generated about $2.9 billion and for fiscal 2026, expectations are $4 billion in annual revenue and until fiscal 2029, revenue is expected to double again to $8 billion. This would result in a CAGR of 22.5% in the next five years.

And although the Internet of Things was struggling a little bit in the recent past, Qualcomm still has high-growth expectations for the next five years. Revenue from IoT is expected to grow at a similar pace as Automotive and between fiscal 2024 and fiscal 2029, management is expecting an annual growth rate of 21% resulting in $14 billion annual revenue in fiscal 2029. And in the connected and embedded world, Qualcomm (and many others) are expecting to see gigantic use cases for IoT – including in Retail, Smart Home, Energy, Industrial Automation or Enterprise & Buildings.

And as long as we are talking about growth potential, when can mention the Snapdragon platforms, which Qualcomm introduced recently, and emphasize the on-device AI capabilities. With the adoption of AI accelerating – for example on smartphones – the demand could rise and Qualcomm’s AI chips, the Snapdragon, might play a critical role. Additionally, the Snapdragon Digital Chassis will expand the footprint of Qualcomm in the automotive market – a market where Qualcomm is expecting high-growth rates (see section above).

Risks

And trying to diversify is certainly a good strategy for Qualcomm as the business is certainly facing some risks. One major risk is the fact, the Samsung Electronics Co. (OTCPK:SSNLF) as well as Apple Inc. (AAPL) are each responsible for more than 10% of total revenue. Qualcomm does not disclose accurate figures, but estimates are that Samsung and Apple combined were responsible for more than 40% of revenue in 2022. The number might be a little lower now, but such a concentration gives the customer some kind of pricing power over Qualcomm, which is not good.

And this is a huge risk if suddenly one of those two customers is deciding not to be a customer anymore. Especially Apple has demonstrated in the past that it might try to produce as much as possible in-house and has surprised companies in the past (like Intel). Apple is working on its own 5G modem, but it obviously has troubles and is not expecting to be successful before 2027. Apple is already working on its own modem since 2019, and this is also demonstrating that it might be rather difficult and not so easy – speaking for some kind of moat around Qualcomm’s business. Now, let’s look at the question in more detail if Qualcomm has an economic moat or not.

Economic Moat

We already saw that the income statement of Qualcomm is not really demonstrating stability and consistency. And this is a first sign that the company might not really have a wide economic moat around the business. However, when looking at the stock price in the last few decades, we see an impressive outperformance over the S&P 500 and a stock outperformance over several decades is a hint that a company might have a wide economic moat

And while we might come to the conclusion that Qualcomm has an economic moat when looking at the stock performance, the margins of the business are speaking a different language. We can start by looking at the gross margin and we certainly see some fluctuation. And when looking at the operating margin, the picture gets even worse as the operating margin is missing any signs of consistency and is fluctuating heavily.

Of course, there is an explanation for the fluctuations, and it is more or less the same explanation as for the wildly fluctuating earnings per share and free cash flow. Qualcomm is a cyclical business, and it is extremely difficult for a cyclical business to report stable margins. And it is not like a cyclical business can’t create a wide economic moat around its business, but it is certainly more difficult for such a business to create a competitive advantage.

Additionally, we can look at return on invested capital and over the last ten years, the reported RoIC of Qualcomm was on average 19.10% and in the last five years it was even 31.36%. These are extremely high metrics for return and a sign of a wide economic moat. But once again we see huge fluctuations between the different years. When trying to summarize the metrics, we can at best call the metrics a very mixed picture.

And when trying to identify from which source an economic moat might stem, it is difficult to identify sources of an economic moat. I don’t see any network effects; I don’t see the brand name playing a role.

Of course, we can mention patents, which might be important. In its earnings call, Qualcomm is mentioning its patent portfolio again and again and this is certainly an intangible asset that is important. But I don’t know if these patents are enough to justify a wide economic moat. And a second source for a potential moat might be cost advantages. And in the case of semiconductors, we can speak of a commodity to some degree. And commodities are often very difficult – especially when a company is trying to generate a wide economic moat. In such a case, cost advantages are mostly possible when a company is able to lower its costs and produce cheaper compared to its competitors. For commodities, the price is often determined by the market and for all market participants the same, meaning the individual companies don’t have any pricing power. Of course, semiconductors are not really a commodity – like oil, salt or petroleum. Semiconductors can differentiate in quality and a company might charge a higher price for a semiconductor that is seen as better by the market. The problem remains that competitors might copy innovations over time and produce chips with similar quality – and this is undermining pricing power.

Overall, there might be signs for an economic moat around Qualcomm’s business, but I would see the moat as rather narrow and certainly not so deep.

Intrinsic Value Calculation

In the end, one step is missing, but that step is essential – calculating an intrinsic value for the stock to determine if it might be fairly valued or over/undervalued. To get a first feeling if a stock is over- or undervalued, we can look at simple valuation metrics.

In case of Qualcomm, the price-earnings ratio as well as the price-free-cash-flow ratio as fluctuating heavily – which is not surprising after we now know that margins are fluctuating and even revenue is not really stable. At the time of writing, Qualcomm is trading only for 17.6 times earnings and for 16 times free cash flow. These valuation multiples are not only below the 10-year average (21.03 for P/E ratio and 20.61 for P/FCF ratio), but also low on an absolute basis.

Aside from looking at simple valuation multiples, which are rather indicating that Qualcomm is fairly valued or cheap, we can also use a discount cash flow calculation to determine an intrinsic value. As always, we are using the last reported number of diluted shares outstanding (1,129 million) and are calculating with a 10% discount rate. The basis in our calculation can be the free cash flow of the last four quarters, which was $11,160 million. When being rather conservative in our assumptions and assume not only 4% till perpetuity but also for the next few years, we get an intrinsic value of $164.75, and the stock is slightly undervalued.

However, we can also be a little more optimistic and assume higher growth rates for the next few years. We could argue for 10% growth annually in the next ten years – in line with analysts’ assumptions – followed once again by 4% growth till perpetuity. This would result in an intrinsic value of $245.62 for Qualcomm and the stock would certainly be undervalued at this point.

We also can look at capital expenditures and see the amount declined on an absolute basis in the last few quarters. Especially when comparing capital expenditures to revenue, we see that Qualcomm is spending only a fraction of its revenue in the last few years. Maybe the current capital expenditures are enough for Qualcomm to keep up and there are certainly business with low capital expenditures – by the way, these are often great businesses. But it might be possible that Qualcomm must spend higher amounts as capital expenditures in the coming years and this might reduce free cash flow.

And when looking at some of the peers of Qualcomm, we see a wide range of capital expenditures – from extremely low to extremely high (Texas Instruments for example). In the end, higher capital expenditures seem possible and maybe 10% growth is a little too optimistic, but Qualcomm might be slightly undervalued at this point and a good investment.

Conclusion

Qualcomm seems like a business well positioned for the future. We certainly should not ignore potential risks, but the company’s efforts for diversification should make the business less dependent on Apple and Samsung in the years to come. Aside from diversification, the “new” business segments Automotive and Internet of Things also offer high growth potential in the years to come. Overall, I think Qualcomm could be a cautious “Buy” now. It is probably not a bargain, but it is certainly not trading above its intrinsic value.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Qualcomm stock, down nearly 30% from its all-time highs, shows signs of a potential breakout due to strong technical indicators and improving fundamentals.
• Technical charting reveals a neutral outlook with balanced support and resistance levels, but indicators like RSI and stochastics suggest strengthening bullish momentum.
• Fundamentals are robust, with significant YoY revenue and EPS growth, indicating the stock is undervalued and deserving of P/S and P/E multiple expansion.
• Combining technical and fundamental strengths, I believe Qualcomm is primed for an upward move, making it a buy recommendation.

Thesis

Down nearly 30% from its all-time highs and in a current trading range, from my analysis, I believe QUALCOMM Incorporated (NASDAQ:QCOM) stock could be ready to stage a breakout. In the below technical analysis, I determine that the chart and moving averages show a neutral outlook. However, the strength in the indicators was the deciding factor as there were signs of broad strengthening in the stock, indicating that an upside breakout is likely. For the fundamentals, with increasingly strong revenue and EPS growth, I believe the stock is undervalued at current levels as the P/S and P/E ratios deserve multiple expansions. The growth trajectory is impressive and is much better than back in 2023. Therefore, after considering both technical and fundamental factors, I believe the stock is primed for an upward move and deserves a buy rating.

Technicals

Charting

There is quite a lot going on in Qualcomm’s chart. First of all, the stock broke below an uptrend line back in late July and early August, ending the uptrend that dated back to 2023. The stock, however, broke the more recent downtrend line in September to move into a more neutral trading range. The nearest support level would be in the high 150s, as that area was resistance very early in the year and has been support multiple times since. The other support area would be in the low-150s, as that price level was key support in August as well as in November.

For resistance, the nearest level is very near the current stock price. The resistance level is in mid-160s and has been support many times throughout the year, particularly in recent months. However, it already started to act as resistance back in November. The next source of resistance would be in the mid-170s with it being resistance already many times during the year. The 180 level is also resistance as it represents the nearest unfilled downward gap in the stock and has already acted as resistance in November. Lastly, the former uptrend line could be resistance as well but is quickly moving out of range.

I have circled three other downside gaps that have been unfilled. With the abundance of these gaps occurring in the past few months, there is a possibility that the stock is now oversold and due for a bounce. I also circled an evening star formation at the June peak. This bearish pattern should have given investors an early indication that the trend was about to reverse.

Overall, I believe the chart shows a net neutral outlook for Qualcomm stock, as there is quite a balance of support and resistance. It is in a trading range and the next move is uncertain from analyzing the chart.

Moving Averages

The 50-day SMA had a death cross with the 200-day SMA in September, a major bearish signal. The gap between the SMAs has also accelerated its expansion, showing that there is an increase in bearish momentum in the stock. The stock trades below both SMAs, another signal of weakness. For the EMAs, the 9-day EMA is currently below the 21-day EMA, reflecting near-term weakness. However, the stock has climbed back above both of these EMAs causing the 9-day EMA’s trajectory to improve significantly. The gap between the EMAs is closing, showing that near-term bearishness is receding.

For the Bollinger Bands, the stock is trading right at the 20-day midline. Since we are in neither an uptrend nor a downtrend, the midline’s significance as support or resistance is diminished. Nonetheless, if the stock is to break above this line, it would be a signal of strength and could decrease the likelihood of a downward breakdown from the trading range. Investors should monitor the Bollinger Bands closely to see if this signal occurs. The stock also recently bounced off the lower band, showing that it was oversold and due for a recent bounce.

The moving average analysis also shows a net neutral outlook, in my view, as there were conflicting signals between the SMAs and the EMAs. The SMAs showed longer-term bearishness, but the EMAs reflected that near-term bearishness is receding. In addition, the stock is right at the Bollinger Band’s midline, with no clear crossover signal yet. There is a balance of strength and weakness indications here.

Indicators

The MACD is currently at the same level as the signal line, and so there have been no crossover signals lately. However, the MACD was below the signal line before closing the gap, showing the ongoing receding of bearishness in the stock. For the RSI, it is currently right at the critical 50 level. The RSI only just regained this level and shows that bulls have marginally taken control of the stock from the bears. For the stochastics, the %K line crossed above the %D within the oversold 20 zone, a highly bullish signal. The gap between the lines is also rapidly expanding, showing accelerating bullish momentum in the nearer term. The next thing to watch for the stochastics is to see whether it can cross the 50 mark as another indication of strength.

As a whole, I believe these indicators reflect a net positive current outlook for the stock, as there are signs of strength present in each of the three indicators discussed here. There are signs of strengthening bulls and receding bears, making the technical picture a bright one for Qualcomm.

As an aside, a noteworthy item that applies to all three indicators is the negative divergence at the June peak earlier this year. While the June peak in the stock surpassed the May peak, all three key indicators failed to confirm as they all made lower highs in June compared to May. This should have been a major red flag to investors that the uptrend was nearing its end.

Fundamentals

Earnings

In early November, Qualcomm reported their Fiscal 2024 Q4 earnings and showed quite strong results overall. They reported revenues of $10.244 billion, up 19% YoY from $8.631 billion. For EPS, they reported a diluted GAAP figure of $2.59, an impressive 96% increase YoY from $1.32. Both revenue and EPS beat expectations, with revenue beating by $309.46 million and EPS beating by $0.20. As you can see in the chart above, revenue growth is back to trending in the right direction after negative growth back in 2023. Revenue growth is currently quite in line with historic standards. For EPS growth, it is also back to trending in the right direction, as it was also negative for the most part in 2023. Although it’s below the five-year high, the current growth rate is impressive and is a signal of fundamental strength in the stock. In addition, the next dividend payout will occur on December 19th and the stock will go ex-dividend on December 5th. The current stock price and dividend reflect a yield of 2.09%.

Valuation

Both the P/S and P/E ratios are currently relatively near their five-year averages, and both have declined since the middle of this year. The P/S ratio is currently at 4.729 after being over 6 a few months ago, and the P/E is at 18.13 after nearing 30 a few months ago. When you compare these valuation multiple charts with the growth charts above, I believe it shows that the stock is undervalued. Revenue growth has improved a significant amount since the middle of the year, but the P/S ratio has fallen. I believe the strengthening in revenues deserves a higher valuation multiple. This is also the case for EPS growth. It, too, has shown significant improvements since the middle of the year, but the P/E ratio has not been rewarded with expansion. As you can see above, the valuation multiples usually track their respective growth rates quite well, and it seems as though they are currently too low after accounting for the increasingly strong fundamentals of the business. Therefore, I would conclude that Qualcomm is undervalued at current levels.

Conclusion

The technicals showed a net positive outlook for the stock with the indicators’ strength being the deciding factor with the chart and moving averages only being net neutral. The signs of strength in each of the three indicators, in my view, should give investors confidence that the bulls have the edge in the stock. For the fundamentals, as discussed above, Qualcomm should see P/S and P/E multiple expansions as the impressive growth rates in its financials demand higher levels in these multiples. The stock is therefore undervalued currently. With the technicals tipping in the bulls’ favor and the fundamentals confirming the strength in the company, I believe Qualcomm is currently a buy as it is well-positioned for a breakout rally.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Qualcomm Stock Is Ready To Break Out (Technical Analysis) appeared first on Up2info.com.

• Qualcomm’s automotive business is rapidly growing, leveraging the company’s strengths in low-power chips and in-cockpit software to capitalize on the ADAS/AV market.
• Qualcomm offers open and modular solutions that allow OEMs to pick and choose the capabilities they require.
• Qualcomm’s recent growth and design wins demonstrate the strength of its product portfolio.
• Qualcomm’s share price is likely to be driven by its handset and IoT businesses in the short-term, but its auto business should become an important value driver in coming years.

Qualcomm’s (NASDAQ:QCOM) automotive business has gone from strength to strength in recent years and is now an important value driver for the company. This opportunity is just beginning though, as the introduction of more advanced ADAS/AV solutions will significantly

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MBLY 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• QUALCOMM’s double beat FQ4’24 performance, promising FQ1’25 guidance, and excellent FY2029 guidance have been met with much skepticism indeed.
• Part of the headwinds are naturally attributed to the ARM legal dispute and takeover rumors with INTC, with it triggering the stock’s discounted valuations.
• If anything, QCOM remains a semi giant with robust prospects in handsets, automotive, broadband, AR/VR, and ARM-based AI CPUs, positioning it for long-term double-digit growth.
• If anything, we believe that the ARM legal dispute may be resolved favorably, similar to the AAPL precedent, attributed to the $40B of businesses at stake.
• At the same time, readers may want to take the INTC-QCOM takeover rumors with a large pinch of salt, attributed to the potentially immense regulatory headwinds.

QCOM Is Inherently Undervalued – Offering Opportunistic Investors With The Dual Pronged Returns

We previously covered QUALCOMM (NASDAQ:QCOM) (NEOE:QCOM:CA) in August 2024, discussing its compelling investment thesis as a well-diversified semiconductor stock, attributed to its robust prospects across

Analyst’s Disclosure: I/we have a beneficial long position in the shares of QCOM, AVGO 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.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

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• Qualcomm Incorporated’s diversification from smartphones is facing mounting challenges, leading to recent underperformance.
• Management attempted to drum up more confidence at its recent investor day, but the market’s reception has been assessed as lukewarm.
• Qualcomm seems well-positioned to benefit from new growth vectors, but the transition will take time to pan out.
• QCOM has consolidated well over the past few months, suggesting it’s positioned to maintain its uptrend bias.
• I argue why the market’s skepticism over Qualcomm’s near-term uncertainties shouldn’t deter long-term investors from buying more.

Qualcomm: AI Traction Seems Missing

Qualcomm Incorporated’s (NASDAQ:QCOM) efforts in driving diversification from its smartphone-driven growth thesis have hit a snag. Accordingly, QCOM has underperformed its semiconductor peers (SMH, SOXX) since its peak in June 2024. As a result, the market has become more discerning in selecting top AI infrastructure leaders partaking in the next phase of the AI growth inflection. Notwithstanding its Android chipset leadership, QCOM hasn’t been able to garner the premium valuation the iOS leader has attained. As a result, investors in Apple (AAPL) have continued to outperform Qualcomm investors as the Cupertino company seeks to divest its exposure to QCOM’s modems.

In my previous Qualcomm update, I upgraded the stock as I anticipated a potential bottoming in its bear market. I highlighted challenges in Qualcomm’s diversification to other fledgling growth vectors, as the market seems unconvinced with its execution. As a result, I’m not surprised that QCOM has also underperformed the S&P 500 (SPX, SPY) since then, as investors reassessed its bullish proposition.

Qualcomm held an investor day recently, as management enunciated its plans to diversify its growth drivers further. The Android chipset leader is keen on assuring investors that it will move away from the assessed slower-growing smartphone chipset market as it seeks to establish itself in automotive, IoT, and Edge AI.

Qualcomm Needs To Shake Off Smartphone Tagging

Accordingly, Qualcomm telegraphed its commitment to lowering its handset revenue to 50% of its total revenue base. As a result, it indicates a significant reduction from its trailing twelve-month metric, as handsets accounted for nearly 64% of its total revenue exposure. However, Qualcomm’s diversification is expected to be achieved only by the end of the decade, lowering the potential for a near-term growth inflection.

In addition, management is confident in achieving a $900B TAM across its key growth vectors. Accordingly, management anticipates an AI PC reaching more than 100M units by 2029. Qualcomm also anticipates solid growth in edge devices, reaching more than 50M devices through 2030. Furthermore, management highlighted its growing $45B automotive design win pipeline, underscoring its confidence in its diversification thesis. As a result, Qualcomm expects to achieve an additional $22B in combined revenue through 2029.

Qualcomm: Market Pessimism Overstated?

Notwithstanding the company’s optimism about its long-term growth opportunities, I assess that the market remains lukewarm over its near-term uncertainties. Although Wall Street’s estimates on Qualcomm have been lifted, its “D” growth grade underscores the need to convince the market before a more robust valuation re-rating.

Moreover, the market also needs to consider Apple’s modem business loss as the Cupertino company moves in-house. It could intensify Qualcomm’s near-term execution risks, even as it seeks to diversify its revenue exposure through 2029.

Despite that, analysts seem confident that the impact on the company’s profitability metrics is not significant. Notably, the AI-driven smartphone upgrade cycle has the potential to drive higher ASPs over time. In addition, the increased production scale of its IoT and AI PC business segments is expected to help mitigate headwinds attributed to Apple. Hence, I assess the market’s pessimism on Qualcomm’s fledging growth optionalities could be overstated. Given the confidence of management to provide more clarity over the revenue outlook of these opportunities over the next five years, it should help allay fears of the cyclical risks in its smartphone segment.

However, recent investor pessimism could also be attributed to the more intense geopolitical uncertainties between the US and China. The incoming Trump administration’s hawkish stance on slapping additional tariffs on China could spur a retaliatory response, potentially impacting Qualcomm’s China revenue. Therefore, it could affect the company’s growing automotive business in China, given the country’s burgeoning EV market, on top of impacting its handsets business. In addition, Chinese smartphone makers could also seek to diversify their reliance on Qualcomm and MediaTek (OTCPK:MDTTF) moving ahead as more Chinese companies seek to lower their US exposure. These near-term challenges are expected to weigh on QCOM’s sentiments, suggesting investors must exercise patience.

Is QCOM Stock A Buy, Sell, Or Hold?

QCOM’s price action suggests the surge toward its June 2024 highs has been digested as the market reassessed its optimism on the stock. QCOM’s forward adjusted PEG ratio of 2.29 is almost 20% over its tech sector (XLK) median. Hence, it’s clear that the market has rotated out of QCOM, as its momentum grade has been downgraded from “A+” to “D+” over the past six months.

Despite that, dip buyers seem prepared to hold the defensive line above the $150 level. While I have assessed an accumulation phase over the past three months, buying sentiments on QCOM are expected to remain tepid. However, Qualcomm’s fundamental thesis has remained intact, bolstered by its rock-solid profitability, notwithstanding the anticipated loss of its Apple business.

Moreover, management’s ability to pencil in pivotal revenue metrics for its crucial growth vectors through 2029 is expected to provide much-needed clarity for long-term investors. Although near-term geopolitical, cyclical, and smartphone headwinds could affect its re-rating opportunity, long-term investors should find the current levels attractive to accumulate.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing, unless otherwise specified.

I Want To Hear From You

Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SMH, AAPL 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Qualcomm remains a strong semiconductor investment, replacing Intel with a conservative IT play due to its high free cash flow, dividend growth, and significant share buybacks.
• Despite a recent dip, Qualcomm’s Q4 earnings beat expectations with an EPS of $2.69 and revenue of $10.24B.
• Qualcomm’s Magic Formula score of 30.9, though lower than 2023, still indicates strong returns on invested capital and earnings yield.
• With fair value at $216/share using an owner-earnings discount, Qualcomm is selling at a 26% discount, making it a buy with continued dividend growth and a pristine balance sheet.

The replacement for Intel in a portfolio

It’s been a while since I updated my opinion on Qualcomm (QCOM). The last article I wrote on the company was in July of 2023. My argument at the time was it being mispriced in a cyclical downturn and was still trading at an attractive earnings yield and a high return on invested capital.

Qualcomm had also gone on to reduce its shares outstanding by 34% in the decade prior to 2023 and now has 20 years of dividend growth to boot. The total return on the stock since that article was published has beaten the market up to this point:

My additional argument for buying Qualcomm as your lead US chip company to replace Intel in your portfolio was that they were still generating lots of free cash flow. At the time [2023], Intel was going into negative free cash flow [where they still remain]. Intel was at one time looked at as a steady and reliable dividend play. That is the case no longer with the mountain of CAPEX that they have taken on trying to build out US semiconductor FABs.

Qualcomm also has a China problem, like many other semiconductor companies do. With 46% of total revenue coming out of the country, this is a risk I’d like to examine that seems more prescient with the incoming administration.

The stock has come back down to earth a bit, which is good news for investors. The market didn’t seem to like both a possible acquisition of Intel (INTC) on the table [probably impossible, but we’ll see] and a seemingly slowing of demand for Apple (AAPL) iPhones. Part of Apple’s demand issue might be the lack of features that would entice an upgrade. Qualcomm is luckily on all fences working with Samsung, LG, and a few other Chinese makers running Android in addition to a deal in place with Apple through 2026.

First things first, let’s compare and measure the data from 2023 and 2024 to see if this is still a buy.

Year to data performance

On a total return basis, the stock is still in the positive year to date. It was really soaring in the summer time and has since settled below what the market (SP500) is returning so far this year.

Revenue exposure post Q4 print

Courtesy of Seeking Alpha:

Q4 2024 :

EPS of $2.69 beats by $0.12 | Revenue of $10.24B (18.22% Y/Y) beats by $309.46M.

All numbers in millions courtesy of Qualcomm most recent 10K filing:

Click to enlarge

Click to enlarge

How Qualcomm reports revenues:

Revenues. We disaggregate our revenues by segment [Note 6], by products and services [as presented on our condensed consolidated statement of operations], and for our QCT [Qualcomm CDMA Technologies] segment, by revenue stream, which is based on the industry and application in which our products are sold. In certain cases, the determination of QCT revenues by industry and application requires the use of certain assumptions. Substantially all of QCT’s revenues consist of equipment revenues that are recognized at a point in time, and substantially all of QTL’s.

[Qualcomm Technology Licensing] revenues represent licensing revenues that are recognized over time and are principally from royalties generated through our licensees’ sales of mobile handsets.

The largest and most substantial part of the Qualcomm revenue stream is in the QCT segment, making up about 85% of total revenue.

Here we can see clearly that Qualcomm is a semiconductor equipment and services play, growing that segment at a blended top-line average of 9.2% year over year. Within that segment, handsets make up 73.1% of the total. Qualcomm, for the most part, is a play on handset [cell phone] processors first and foremost and a bet on Android devices versus Apple IOS. While Apple still intends to use Qualcomm chips through 2026, they are also the most aggressive in taking the endeavor in-house.

Measuring the earnings

On a ten-year basis, all profitability metrics are now at lower growth rates than share price. Back in late 2022 and early 2023, the share price dipped below 10-year EPS growth, which was a bullish signal. Although the gap between most of these profitability metrics is not huge, we will have to incorporate some more near term growth rate visualizations to see if this is still a buy.

Nearer term 5-year data:

With the above chart, I am being mindful that growth rates for Qualcomm have picked up a lot recently [last 5 years] versus the last 10 years. This is a company that was not doing well at one time and was almost taken over by Broadcom (AVGO) in 2018. If we look at the 5-year growth rates versus price, Qualcomm’s price action has actually lagged the growth in profitability. A good signal.

Although free cash flow growth has dipped down a bit, as has basic EPS [not normalized], we can hopefully expect a return to free cash flow growth with analyst expectations for increases in GAAP net earnings for full year 2025 and full year 2026.

Magic formula score 2023 vs 2024

The Magic formula is a great indicator for highly cyclical stocks like semiconductors, as return on invested capital [ROIC] is a big component of the score. This scoring system, popularized by Joel Greenblatt, adds together the earnings yield [using EBIT/EV] plus the ROIC. The higher the score the better, with earnings yield representing the “cheapness” of a stock and ROIC representing the quality of management [getting the best returns on capital].

In 2023, I estimated that Qualcomm had a score of 37.4. This comprised a 9% earnings yield and a 28.4% ROIC. I’ll run the same calculations today to see where we stand. First, I’ll start with ROIC:

NOPAT (net operating income after taxes)/total LT + ST borrowings + total equity, aka “invested capital”.

• NOPAT = TTM EBIT of 10,253 X (1-2.2%)= 10,027
• Short-term debt= 4,196
• Long-term debt = 13,270
• Total equity capital= 26,274
• Total invested capital= 43,740
• NOPAT (10,027)/Invested capital (43,740)= 22.9% ROIC

Next we’ll look at the earnings yield, which by definition here we are using EBIT/EV [the inverse of EV/EBIT to produce a yield]. With a current FWD EV/EBIT of 12.56 X, this equates to an earnings yield of 8% [7.96% to be exact] by inverting this multiple [1/12.56].

The total score today is 8+22.9= 30.9.

This is still a great score but 7.4 points lower than 2023with lower returns on capital and lower net operating income after taxes. The score was propped up a bit by some debt pay down.

I noted in the last article that these cyclical companies are well evaluated by looking at their earnings yield and ROIC to see both at what point they are in the cycle [falling or rising] and to see if they are cheap enough on an earnings yield basis to make up for falling returns on capital if that is the case. Magic Formula scores of 20 or higher are generally considered good, but a falling score trend year over year is still worth taking note of.

Valuation

While this is in a “growth” area of the market, Qualcomm itself is not a growth stock, but they have grown EPS on a 5-year basis. If we take into consideration full-year 2024 EPS of $10.2 a share, 2021 to 2024 would have the following compounded annual growth rate [CAGR]:

Click to enlarge

So we can take PEG ratio analysis out of the equation. This is more of a dividend-paying, steady Stalwart than a fast-growing NVIDIA-like company at this time. Yes, on a year-over-year basis [2023 to 2024] EPS is up 21%, but this is simply getting back in line with the high top cycle EPS numbers of 2022 where Qualcomm printed $11.52/share in EPS. This is an example of cyclicality, long-term growth is expected, but it comes in waves up and down.

Using an owner-earnings discount is more appropriate. In this case, we will discount “owner earnings” [defined as TTM net income + depreciation and amortization – TTM CAPEX] by the risk-free rate of return [10-year Treasury rate]. Since Qualcomm has earnings growth expectations for the next two years, a purchase of a stock with an earnings yield higher than the risk-free rate after CAPEX requirements plus growth in the future pipeline is a better deal than the risk-free alternative:

All numbers in millions of USD

• TTM Net Income: 10,142
• TTM Depreciation and Amortization: 1,706
• TTM CAPEX: 1,041
• Equals “owner earnings” of: [[10,142+1706]-1,041]= 10,807
• Discounted by risk-free rate [4.45%] : $240,155 fair market cap
• Per-share fair price: $240,155/1111= $216/share fair value
• Selling at a 26% discount to fair value

Typically, we would like an entry point with a discount of 20% to fair value using this metric. Qualcomm still fits in this parameter. Let’s compare this to Wall St. estimates:

Here we can see that my estimate of $216 sits right in the middle of Wall St. estimates. If we discount this amount by 20%, we’d get to $172.8/share. That is my low end and the point at which I would downgrade Qualcomm from a buy to a hold once it crosses this price. Looks like this pull back gives us another buying opportunity.

Dividend yield 2023 vs 2024

• July 2023 FWD dividend [$3.2]: 2.72% with a 28.28% payout ratio.
• November 2024 FWD dividend [$3.4]: 2.08% with a 32.32% payout ratio.

Good to see that we have continued dividend growth, with a 1 year growth rate of 6.45% and a 10-year growth rate of 7.92%.

Again, a worse deal than 2023, but not bad for the IT sector.

Growth catalysts

First and foremost, this is a cell phone chipset play. Qualcomm has the highest revenue exposure to this segment. Qualcomm now claims that the Snapdragon 8 Elite is the world’s fastest mobile CPU. With R&D spending seemingly paying off here, these new rates of speed and power saving can hopefully keep Apple at the table longer than 2026. With Siri and other questionably “intelligent” aspects of the iPhone lacking, they may want to reconsider trying to do in-house everything. Sometimes you just can’t be the “ruler of all” in your world, it’s good to cooperate.

Automotive is the highest growth rate segment for Qualcomm’s earnings and revenue. Qualcomm is the largest automotive chipmaker, and this is a segment that should only skyrocket as more and more ADAS [Advanced Driver Assistance System] systems come to market in conjunction with autonomous driving systems. It is no coincidence that this is the highest growth segment. Cars are the new smart device. I am personally very bullish on this aspect of Qualcomm.

Finally, we come to the one shrinking segment year over year, IoT. This is also the second-largest revenue segment. Although this area is not Qualcomm’s strong point, more and more on-shoring expected in this second Trump administration could see an increase in demand for industrial chip applications.

A “shot gun” wedding in bound?

The Intel conundrum should continue to swirl. A more favorable FTC should allow for more mergers. However, this may also require China regulatory approval:

The merger of the two tech giants would inevitably attract significant scrutiny from antitrust regulators globally, which includes China, as it is a crucial market for both, Bloomberg suggests. Therefore, it is understood that Qualcomm informally consulted with antitrust regulators in China to assess their position on any possible deal in September, though no response has been received, according to the report.

President-elect Trump is a deal-maker. He may have to personally make a deal with China if he believes this is in the best interest of the country. This could be a critical step to secure the US Chip supply chain and hedge bets against future uncertainty over Taiwan. I would have brushed this one-off if Harris had won, but now anything is on the table in my opinion. Intel needs a capable operator and their current management seems to be flailing. Intel is a US national security interest along the same lines as Boeing (BA).

Balance sheet checkup

Qualcomm still has a beautiful balance sheet, as it did in 2023. Cash and short-term investments almost equal to long-term debt. Long-term debt is only 1.14 X EBITDA. Shares outstanding are down and to the right.

On a TTM basis, Qualcomm has now returned $8.74 Billion to shareholders in a combination of share repurchases and dividends. This equates to $7.86 a share, or a shareholder yield of 4.9% for both the dividend yield and buybacks over the TTM. If we want to take debt pay-down into consideration, the yield is even better.

Risks and summary

Qualcomm, like NVIDIA, has a China problem. While Qualcomm’s chip applications seem like a safer item to not be restricted since most chips are used for phones and vehicles versus having possible weapons applications, they are still reliant on China. With 46% of revenue coming from the country with a lot of important handset makers.

As per Reuters on the most recent November earnings call:

The company shot down a question on a post-earnings call on whether the surge in China sales were prompted by concerns over possible tariffs that could be put in place by Donald Trump, who was re-elected as U.S. president on Tuesday.

This is the biggest issue surrounding a lot of the semi-industry. The company also relies on several foreign FABs to produce their chips. All of these are risks that are incalculable.

The stock still looks undervalued to me after this pullback. On a 5-year basis, profitability growth is markedly higher than share price growth. The stock still has a Magic Formula score above 30, a dividend yield over 2% with a low payout ratio, a pristine balance sheet, and trades under fair value on an owner-earnings discount basis. Automotive systems are my favorite catalyst,

and the Snap Dragon 8 looks to be the most advanced handset chip in the world. Qualcomm is still a buy, not as strong as 2023, but a buy nonetheless.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of QCOM, AAPL, INTC, BA 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.

The information provided in this article is for general informational purposes only and should not be considered as financial advice. The author is not a licensed financial advisor, Certified Public Accountant (CPA), or any other financial professional. The content presented in this article is based on the author's personal opinions, research, and experiences, and it may not be suitable for your specific financial situation or needs.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Qualcomm posted $10.2 billion in Q4 revenue (+18% YoY) with 35% YoY EPS growth.
• Record $899 million in automotive revenue (+68% YoY), driven by new vehicle content and AI platforms.
• IoT revenues grew 24% sequentially, powered by new product launches and normalized channel inventory.
• Qualcomm’s licensing business boasts a 74% EBT margin, leveraging its strong 5G intellectual property portfolio.
• Snapdragon platforms deliver cutting-edge AI and power efficiency, solidifying Qualcomm’s edge in AI, mobile, and IoT markets.

Investment Thesis

Following our latest coverage, Qualcomm’s (NASDAQ:QCOM) performance remained relatively muted despite an earnings and revenue beat, presenting a potential accumulation opportunity for long-term investors. QCOM has strategically positioned to capitalize on explosive growth in automotive, IoT, and AI markets while maintaining leadership in mobile and 5G technology.

Record-breaking automotive revenues and surging IoT performance underscore its diversified growth strategy. Snapdragon platforms, with industry-leading AI and power efficiency capabilities, expand Qualcomm’s edge computing dominance. Combined with a 74% margin licensing business, disciplined operations, and profitability, Qualcomm is a resilient leader in transformative tech markets.

Q4 2024 Breakdown: $10.2 Billion Total with 21% YoY EPS Growth

Qualcomm’s revenue performance in fiscal 2024 reflects solid financial standing. The company hit revenues of $10.2 billion in Q4 with +18% annual growth. Here, its diversified business segments played a central role in these results. The chipset business generated $8.7 billion (+18% year-over-year (YoY) in revenues, and the licensing business contributed $1.5 billion (+21% YoY) to total revenues. The chipset business (QCT) holds most of Qualcomm’s revenue, with its products becoming dominant in markets such as mobile devices, IoT, automotive, and edge AI.

The licensing business (QTL) also led to considerable profitability with an EBT margin of 74%, indicating the high-margin nature of Qualcomm’s intellectual property business. At the bottom-line, Qualcomm had 35% YoY growth in fiscal 2024 normalized diluted EPS that points to the company’s stable capability to generate profits. Interestingly, this growth happened while maintaining flat operating expenses, indicating a solid operational discipline. In short, these results show Qualcomm is scaling operations, managing costs stably, and beating street estimates.

Moreover, Qualcomm’s expansion into automotive and IoT markets is one of its major growth drivers. The automotive revenue in Q4 hit a record high of $899 million, representing a 68% YoY growth. The growth came from increased content in new vehicle launches. Fundamentally, Qualcomm is becoming a leader in automotive connectivity and AI-driven platforms and now leads in digital cockpits and advanced driving assistance systems (ADAS).

Further, Qualcomm’s automotive division (QCT) achieved its fifth consecutive quarter of record revenue. Here, the YoY growth points to Qualcomm’s more profound presence in the automotive industry. Its automotive platforms are now integrated into major car brands like Li Auto and Mercedes-Benz. Platforms like Snapdragon Ride Elite and Cockpit Elite are designed for multimodal AI and driving workloads. Qualcomm’s IoT business also showed robust performance. QCT IoT revenues grew by 24% sequentially. This increase was driven by new product launches and the normalization of channel inventory. Qualcomm’s IoT solutions strategically target industrial edge computing, robotics, and AI, expanding its market.

Looking forward, Qualcomm is projecting 50% growth in automotive revenues in the near term. The IoT division is expected to grow by 20%. These projected growth rates show that Qualcomm’s diversification strategy is sharp in capturing beyond the annual IoT market growth of 10.5% (2024-2029).

Over the long-term, Qualcomm’s focus on AI and edge computing may serve as a core factor in its growth. The Snapdragon platforms, like the Snapdragon 8 Elite and Snapdragon X Series, lead in AI performance. Technically, the Snapdragon 8 Elite features a second-generation Oryon CPU that delivers 30% faster performance with 57% less power consumption than its predecessor. This advancement is vital for maintaining a lead in the power efficiency-hungry mobile processor market. The Snapdragon 8 Elite also integrates a hexagon NPU for AI performance and power efficiency. This boosts both AI performance and power efficiency by 45%.

At the core, Qualcomm’s Snapdragon platforms can handle AI and Gen AI tasks in real-time, including natural language processing, computer vision, and multimodal AI, giving Qualcomm a competitive edge and moat. The Snapdragon X Plus targets personal computing by integrating AI-powered features, opening new consumer, industrial, and automotive revenue possibilities. Qualcomm’s edge AI technologies process data locally on devices (ideal for AI PCs) rather than in the cloud. Technologies like Snapdragon AR1 Gen 1 and Snapdragon XR2 Gen 2 power next-gen AR/VR and industrial IoT. In short, Qualcomm’s on-device AI capabilities make it a significant lead in the AI and edge computing market that is growing at a ~37% annual growth.

Finally, Qualcomm’s licensing business remains one of the semiconductor industry’s highest margin (74%) segments. Qualcomm’s intellectual property portfolio in wireless communications and 5G gives it a strong edge in licensing. The licensing strategy of long-term agreements has paid off, enabling the company to maintain solid margins and predictable revenue.

Progressive licensing renewals in fiscal 2024 reflect Qualcomm’s ability to grow its licensing business and remain a leader in 5G tech. With the growing adoption of 5G, Qualcomm’s licensing business stands to benefit. The widespread deployment of 5G networks and devices may continue to boost Qualcomm’s licensing revenue.

Dependency on Large Customers and Geographic Concentration Risks

Despite Qualcomm’s claims of geographical diversity, China has been a significant driver of automotive growth. Any slowdown in the Chinese market or geopolitical risks under Trump 2.0 could disproportionately impact growth. Qualcomm’s automotive growth is tied to the launches of new models featuring Snapdragon Ride Elite and Cockpit Elite solutions. These technologies involve long design cycles, making them sensitive to delays or cancellations by OEMs under new Tariffs.

In Q4, Qualcomm has seen a strong rebound in China for Android handsets (up over 40% QoQ) but faces challenges elsewhere. In short, Although the company has overcome Huawei’s absence, it remains exposed to geopolitical risks and trade barriers affecting Chinese OEMs. Growth appears uneven, with sequential declines among its top two customers, highlighting geographic and customer concentration risks.

Further, the ongoing legal dispute with ARM over custom-designed CPU licensing rights could pose a significant risk. Qualcomm expressed confidence in its licensing rights, but with the trial set for December 2024, any adverse outcomes could impact its custom CPU developments and licensing revenue. The case outcome could have broader implications for Qualcomm’s stock value based on the change in competitive position, especially in the high-margin premium chipset market.

Moreover, Qualcomm has excluded Huawei from its revenue guidance for the December quarter. In the previous year, Huawei contributed significantly to revenues. However, a decline in business from these major customers is anti-seasonal and poses questions about top-line sustainability. A potential reduction in purchases from other large customers could exacerbate volatility.

Finally, Qualcomm’s planning assumption includes a ramp-down of shares to 20% by the 2026 product launch. This shift would result in a significant revenue decline. This underscores the vulnerability of Qualcomm’s business model to vertical integration trends in the tech industry. Such shifts could require Qualcomm to find new growth avenues in the mid-term or lose substantial market share in its handset business.

Qualcomm: A Discounted Growth Gem With Mixed Signals

Qualcomm’s valuation metrics paint a compelling picture, revealing both attractive opportunities and areas requiring scrutiny. Its P/E Non-GAAP ratios are particularly notable, with the trailing twelve months (TTM) value at 15.72 and the forward P/E at 14.32, reflecting significant discounts of 34.6% and 41% compared to the sector median. This disparity indicates that Qualcomm is relatively undervalued compared to its peers, considering its strong growth prospects in the automotive, IoT, and AI markets.

Besides, Qualcomm’s PEG ratio stands at 0.48, a 52.7% discount to the sector median of 1.02, which indicates high growth at a reasonable price. In contrast, its forward PEG ratio is 2.34, representing an 86.9% premium to its five-year average, indicating that future growth expectations are partly factored into its stock price.

Meanwhile, its EV/EBITDA at 15.09 is well within the comfort zone below the sector median, reflecting Qualcomm’s efficiency and profitability. Its relatively high price-to-book ratio, though, TTM at 6.80 – more than double the median of its sector – does raise some concern concerning valuation against the level of its net assets. It thus sends a mixed signal – the significant growth potential at an attractive price offered on the one hand and, on the other, premium asset valuation for Qualcomm, which prima facie has to offset this positive perspective.

Takeaway

Qualcomm’s diversified growth strategy, led by record-breaking automotive and IoT revenues and its cutting-edge Snapdragon AI platforms, positions it as a dominant player in transformative tech markets. With a high-margin licensing business and disciplined operations fueling profitability, Qualcomm’s future in automotive, AI, and edge computing looks promising. However, geopolitical and customer concentration risks warrant close monitoring. For long-term investors, Qualcomm remains a compelling opportunity in high-growth sectors.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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