Qualcomm Stock Is Up 40% This Year As AI And Auto Business Surge

-6.80%
Downside
202
Market
189
Trefis
QCOM: Qualcomm logo
QCOM
Qualcomm

Mobile chipset major Qualcomm (NASDAQ: QCOM) has seen its stock rise by a solid 41% year-to-date. There have been several factors driving the recent gains for the company, including signs of a recovery in the smartphone market and optimism that the generative AI trend will help smartphone sales. Qualcomm also published a better-than-expected set of Q2 FY’24 results last month, with guidance for Q3 also coming ahead of estimates. The company sees revenue of between $8.8 billion and $9.6 billion for Q3, marking an increase of over 13% at the upper end of guidance, with earnings coming in at between $2.15 and $2.35 per share.

While the smartphone market saw a lull in 2023, as the Covid-19 pandemic eased and economic uncertainty weighed on consumer spending, things have been looking up of late. Per Canalys, worldwide smartphone shipments grew 11% year on year over the first quarter of 2024. This is helping Qualcomm’s CDMA Technologies (QCT) segment, which supplies application processors, modems, and software for mobile devices, networking equipment, and consumer electronics.

The surging interest in generative artificial intelligence is also benefiting Qualcomm. The company is seeing higher demand for high-end chipsets such as the Snapdragon 8 Gen 3 that are optimized for AI, including enhancing voice assistants and generating images. Moreover, Qualcomm is also seeing higher demand from China, where local OEMs have increased their uptake by over 40% compared to last year, as demand for premium Android devices grows at the expense of Apple’s iPhone. Qualcomm’s chips also appear to be gaining traction in the PC market, as vendors look to deploy AI natively into computers. In May, Microsoft and other Windows PC players announced new computers with artificial intelligence features using chips including Qualcomm’s Snapdragon X Elite and Snapdragon X Plus processors. The X Elite processor has an integrated NPU (Neural Processing Unit)  which is specifically designed for executing machine learning algorithms.

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Qualcomm’s automotive business is also faring well as semiconductors play a much bigger role in the transportation industry with trends such as electrification and autonomous driving gathering pace. Semiconductor content in vehicles has also been soaring. Per Deloitte, electronics account for 40% of a new vehicle’s total cost, up from under 20% in 2000. The number is likely to grow to over 45% by the end of this decade. Qualcomm’s automotive revenues rose by 35% year-over-year in Q2 FY’24 to $603 million. The company’s Snapdragon Digital Chassis solution – which is a set of cloud-connected platforms for telematics and connectivity in cars – now has a design win pipeline of roughly $45 billion. Qualcomm indicates that it is gaining market share, remaining on track for over $4 billion in automotive revenue by FY’26.

Now the optimism surrounding artificial intelligence and Qualcomm’s automotive business has driven its stock up 35% from levels of $150 in early January 2021 to around $205 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. That said, the increase in QCOM stock has been far from consistent. Returns for the stock were 20% in 2021, -40% in 2022, and 32% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that QCOM underperformed the broader indices in 2021 and 2022.

In contrast, the Trefis High Quality (HQ) Portfolio has outperformed the S&P 500 each year over the same period, providing better returns while taking on less risk versus the benchmark index. Less of a roller coaster ride, as is evident in HQ Portfolio performance metrics. Given the uncertain macroeconomic environment with elevated interest rates, could QCOM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Qualcomm stock trades at just about $204 per share, or about 22x consensus FY’24 earnings. Although this isn’t exactly a high multiple, there are some concerns. Qualcomm’s revenues are likely to see little growth this year. Moreover, competition in the company’s core mobile chipset space is also mounting. For instance, China’s Huawei’s new smartphones will feature its proprietary Kirin processors going forward, leading to lower sales for Qualcomm. There is also speculation that Samsung could also drop Qualcomm processors on its upcoming flagship in favor of its own Exynos line of chips.  We have a $189 price estimate for Qualcomm, which is slightly below the current market price of $204. See our analysis of Qualcomm Valuation: Expensive Or Cheap? for more details on what’s driving our price estimate for the stock.

 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 QCOM Return 0% 41% 213%
 S&P 500 Return 0% 11% 136%
 Trefis Reinforced Value Portfolio 0% 4% 640%

[1] Returns as of 6/3/2024
[2] Cumulative total returns since the end of 2016

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