Qualcomm Beats - And Proves It Has No Intentions of Just 'Phoning It In'
The chip and chipset maker reveals it's moving further into these other areas, which should lessen its reliance on the smartphone market.
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*Qualcomm delivered a beat-and-raise quarter
*We are maintaining our long-term $255 price target
*We continue to see Qualcomm diversifying its customer base in key areas, which will make it less dependent on smart phones
Last night, Qualcomm QCOM reported a beat-and-raise quarter, confirming the ramp expected in the second half of the year. While the company’s handset business continues to be the largest driver of its business, the real story of the quarter was the unfolding transformation in its business mix. That transformation includes the June-ending quarter launch of its PC-related business, which is expected to expand further over the coming months as new models are launched and the array of retailers carrying them expands.
That quarter also saw sizable progress in Qualcomm’s automotive business, which still remains relatively small at less than 10% of total revenue. But that business is backed by its increasing demand from the automotive market. Anyone who has purchased a car is familiar with the long lead times associated with these car designs and models hitting the road.
At the same time, the handset market continues to improve and we see the company benefiting from the AI upgrade cycle. Management sees its handset business following the typical seasonal pattern in the second half of 2024 and noted a modem-only customer, which we believe to be Apple AAPL, boosted its orders for the second half of 2024. When radio frequency (RF) chip companies Skyworks SWKS and Qorvo QRVO reported earlier this week, their respective outlooks supported the seasonal pattern unfolding in the second half of 2024 as well.
Qualcomm also called out the improving China smartphone market that is benefiting from a mix shift toward premium product. Outside of the seasonal ramp, in the coming months, we’ll be looking for license renewal announcements, leading indicators for Qualcomm’s handset business and its very profitable chip licensing one. On the earnings call, management revealed that it recently inked a new licensing agreement with Chinese handset company Honor. In first quarter 2024, Honor was the fifth largest smartphone vendor in China with 16.1% share of the market according to Counterpoint Research, up from 14.75 in the first quarter of 2023.
As we know, historically, Qualcomm has had its fortune, and the share price hitched to that market. Over the coming several quarters, while it will still be a very large part of Qualcomm’s business, that reliance will lessen. With Qualcomm’s current licensing agreement with Apple set to expire in 2027, we see Qualcomm focused on not only working to continue that relationship but also growing its non-handset businesses between now and then to address that license expiration.
With the AI on-device upgrade cycle still in very early innings, we are maintaining our long-term $255 price target on QCOM shares. Should that upgrade cycle unfold faster than expected, it would give us reason to revisit that price target and potentially our "Two" rating.
Despite the beat- and raise-quarter, we could see QCOM shares trade off today given weaker-than-expected guidance from ARM Holdings ARM. Yesterday, we used the recent weakness in QCOM shares to pick up some additional ones for the portfolio. As we made that move we also adjusted our panic point for the position. The fundamental story for Qualcomm remains a vibrant one, and looking at the technicals, we see support at the $161 level and resistance near $187. We could see QCOM shares rangebound in the near-term, but as we move further into August, Taiwan Semi’s TSM July revenue report is a likely catalyst for QCOM shares. We should get that report in the next few weeks.
The Portfolio is long QCOM, AAPL.
