Can Qualcomm Count On Automotive Sector To Drive Its Next Wave Of Growth?

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Qualcomm

While Mobile chipset major Qualcomm (NASDAQ: QCOM) published a mixed set of Q2 FY’23 results earlier this month, with revenue contracting sharply due to a slowdown in smartphone and tablet sales, the company’s automotive business has emerged as a bright spot. Auto-related sales jumped almost 20% year-over-year to about $447 million.  So what exactly does Qualcomm’s automotive business do, and what’s the outlook for Qualcomm in this space?

Qualcomm is looking to diversify its revenue stream away from the mobile phone market, which is increasingly saturated, with vendors such as Apple increasingly moving toward their proprietary chipsets. While Qualcomm has been pushing into other areas such as RF components, the automotive market also looks attractive. Semiconductors are playing a much bigger role in the transportation industry as trends such as electrification and autonomous driving gather pace. Semiconductor content in vehicles has also been soaring. Per Deloitte, electronics account for 40% of a new vehicle’s total cost, up from under 20% in 2000. The number is likely to grow to over 45% by the end of this decade. Qualcomm is well-positioned to be a technology provider in the space, given its success with communication and app processors for mobile devices.

Qualcomm supplies chips broadly targeting three areas, namely infotainment and digital cockpit solutions, connectivity, and advanced driver assistance systems under its “digital chassis” platform. Qualcomm has steadily been winning more business for its automotive segment. Over Q2, the company said that it was partnering with Mercedes-Benz on its next-generation Snapdragon Digital Cockpit Platforms that will be featured in Mercedes vehicles starting in 2023. Moreover, Qualcomm also won 12 new Snapdragon Cockpit and Snapdragon Connectivity 5G Platform designs with automakers globally. The company is also pushing into the automotive safety space, recently acquiring Israel-based fabless chipmaker Autotalks which provides technology to detect road hazards.

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Total automotive revenue stood at $975 million in FY21 and $1.3 billion in FY22, and Qualcomm has estimated that the number could grow to $4 billion by FY 2026. Qualcomm has a long-growth runway in this business, estimating that the total addressable market for its automotive target market will be $100 billion by 2030. The company estimates that the value of Qualcomm technology and chips per vehicle could eventually range from $200 for an entry-level vehicle to $3,000 for a top-end model.

We remain positive on Qualcomm stock, with a $135 price estimate which is 28% ahead of the current market price. See our analysis of Qualcomm Valuation: Expensive Or Cheap? for more details on what’s driving our price estimate for Qualcomm. Qualcomm trades at just about 12.5x consensus 2023 earnings. While this is partly due to the fact that revenues and earnings are projected to decline this year, the markets project that sales will recover in FY’24 and we believe that areas such as automotive semiconductors will be big long-term growth drivers.

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 Returns May 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 QCOM Return -10% -5% 61%
 S&P 500 Return 0% 8% 86%
 Trefis Multi-Strategy Portfolio 0% 9% 241%

[1] Month-to-date and year-to-date as of 5/17/2023
[2] Cumulative total returns since the end of 2016

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