Latest Results Show Smooth Sailing Ahead for This Chip Holding

While we wait for the Federal Reserve’s November policy statement at 2 p.m. ET and Fed Chair Powell’s soon-to-follow press conference, let’s dig into last night’s quarterly results and guidance from Qualcomm QCOM that bested consensus forecasts and included a significant boost to its share repurchase program. Our cut to the quick thought is that, while Qualcomm delivered solid results that reaffirmed our thinking for its smartphone and AI PC prospects, the earnings call set the stage for the company’s 2024 Investor Day on November 19.

On the earnings call, management shared that it will discuss the ramp in the AI PC business from 20 platforms earlier this year to 58 exiting the September quarter. We will be disappointed if that discussion does not include projected revenue and other targets for the AI PC business. Because the management team is focused on morphing Qualcomm from a wireless communications company into a connected computing one, the odds of it not discussing that impact or the one it sees for its auto business are slim.

Those efforts are part of the ongoing strategy to diversify Qualcomm’s revenue stream away from being overly reliant on the smartphone market. Comparing the September 2024 quarter against the September 2023 one, we see the start of the AI PC business and other connected applications, like Meta’s META Snapdragon-powered Ray-Ban Smart Glasses and Snap’s SNAP recently-introduced Spectacles, chipping away toward that effort. Qualcomm’s smartphone business in the September 2024 quarter was 70% of chip revenue, down from 74% in the September 2023 quarter despite the year-over-year double-digit increase in smartphone revenue. As AI PC and other wins ramp, we should see further progress and we expect this topic to be a focal point at the upcoming Investor Day. Based on its current book of business, Qualcomm sees its IoT business, which houses these end markets, delivering a 20% year-over-year revenue jump in the current quarter.

As those programs ramp up in the near term, Qualcomm’s handset business should benefit from a combination of share gains and content gains in the current quarter. That combination should allow Qualcomm to grow faster than the overall smartphone market, especially given its favorable position in flagship and premium phones. On the earnings call, management shared that the current quarter will benefit from a more than 40% sequential revenue gain from Chinese OEMs and flagship Android handset launches. Parsing management expectation for its handset business to rise mid-single digits year over year in the current quarter, which equates to a 15% or so sequential increase.

All that sets Qualcomm up for the usual seasonal increase in revenue in the current quarter. One thing we did not talk about when it comes to the September quarter was the jump in Qualcomm’s operating margin to 34.1% compared to 30.2% in the year-ago quarter and 32.3% in the June one. The big driver of this was Qualcomm’s licensing business, which benefitted from the company’s smartphone performance in the September quarter. The expected sequential improvement, plus an extra week in the current quarter, suggests that the licensing business will be another large contributor in the December quarter.

That, along with the seasonal ramp in chip margins, allows us to get our arms around the upsized guidance for the current quarter’s EPS of $2.85 to $3.07 on revenue of $10.5 billion to $11.3 billion. That’s nicely ahead of the market consensus that stood at EPS of $2.87 on revenue of $10.61 billion heading into Wednesday night’s earnings.

One other item that was announced alongside Qualcomm’s earnings was the $15 billion increase to its existing buyback authorization program. Coupled with the $1 billion that remained on the program, Qualcomm has ample firepower to support the stock.

As we mark our calendar for the company’s November 19 event, we’ll remain on the lookout for Taiwan Semi’s TSM October revenue report. As we digest both, we’ll revisit our QCOM price target as needed, but we intend to be long-term owners of QCOM shares to capture the unfolding diversification and the positive impact on how the market values the shares.

The Arm lawsuit

One of the overhands on QCOM shares coming into the company’s earnings report is the litigation with ARM ARM over a licensing contract. We didn’t expect Qualcomm to say much about this on the earnings call and what was said largely reiterated the company’s position: “We have a very broad, well-established license rights that cover our custom-designed CPUs. So we are very confident that those rights will be affirmed. The trial is scheduled for December, and so we're looking forward to addressing Arm's claims at that point.”

We continue to think the eventual solution between Qualcomm and Arm is a revised licensing agreement, but we recognize the two companies may need to begin trial proceedings before that outcome is reached.

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At the time of publication, TheStreet Pro Portfolio was long QCOM and META.