Qualcomm Confirms the AI-on-Device Upgrade Cycle Is Approaching
Here's our plan for Qualcomm shares.
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* We are boosting our price target on Qualcomm shares to $210 from $200 following the company’s March quarter results and guidance
* Qualcomm sees its smartphone business bottoming in the current quarter as the AI-on-device upgrade cycle starts to unfold
* Here’s our plan for QCOM shares
Last night Qualcomm QCOM delivered March quarter results that topped expectations with revenue for the period up 1% year over, but similar to our comments with Amazon AMZN’s March quarter results, this is a story about improving margins.
On that 1% top-line gain, the company’s non-GAAP operating profit climbed 11% vs. year-ago levels while its EPS rose 13% to $2.44, was well ahead of the $2.33 consensus. To be fair, the company’s bottom line performance was positively impacted by the 5 million shares repurchased during the quarter, which left it with $3.6 billion remaining under its current program.
We are raising our QCOM price target to $210 from $200 to reflect better than previously expected margin prospects at its QCT chip business and its QTL licensing one. As the expected AI-on-device upgrade cycle ramps, we may need to revisit that price target yet again.
For those who missed the move in Qualcomm shares, given the potential for Apple’s AAPL guidance to underwhelm the market, we could see QCOM shares give back some of today’s gains. If that happens and they pass through the 50-day moving average near $167, the next layer of support would be near $155-$156. That would be a wonderful place for newer members to pick up shares.
With the AI-on-device upgrade cycle ahead of us, we intend to be owners of QCOM shares. Should the shares move into overbought territory, based on the size of the portfolio’s QCOM position, we may look to lock in a sliver of the significant gains compared to the late October share price near $105.
Breaking Down Qualcomm’s Quarter
Qualcomm’s chip business, QCT, posted quarterly revenue of $8 billion, 77% of which is from handsets. That makes it Qualcomm’s largest product category (66% of total company revenue) with IoT and 15% of QCT revenue and the balance from Qualcomm’s Automotive business. For those keeping score, QCT accounts for ~85% of Qualcomm’s revenue and 71% of its operating profit, with the balance derived from its high-margin licensing business.
While relatively small, Qualcomm’s automotive business grew 35% year over year in the March quarter as its automotive efforts for its Snapdragon offering are taking hold. Management noted its automotive design win pipeline stood at $45 billion exiting the March quarter.
Our thinking on this is that while that level of design wins is very impressive, we’ve seen design wins not matriculate. We’ll put more stock in program wins that go into production, but progress in this end market will help diversify Qualcomm’s revenue stream in the longer term. That’s something we can get on board with.
Qualcomm’s IoT revenue in the March quarter rose 9% sequentially and the ramp of AI PCs using its Snapdragon X Elite and X Plus platforms mid-year should drive a stronger second half for this year. Other key markets for Qualcomm in this business segment are AR, industrial, and other networking applications.
That leaves the company’s handset business, which saw its revenue climb 1% compared to the March 2023 quarter and fall more than 7% sequentially. While Qualcomm continues to see the global market for 3G, 4G, and 5G smartphone units to be flat to slightly higher on year over year basis, it also continues to expect 5G smartphone volumes to grow by a high-single-digit to low-double-digit percentage.
Management also shared it sees its handset business falling by mid-single digits in the current quarter before rebounding in the September quarter. This ties with the expected ramp of AI-on-smartphone models from a variety of vendors.
A few weeks back, we discussed how the excess inventory issues in the Android smartphone market were improving. Qualcomm reaffirmed that by sharing its revenue from Chinese OEMs grew by more than 40% on a year-over-year basis in the last two quarters. Contrasting this against other Qualcomm comments, this tells us the 5G China smartphone is accelerating as folks trade up for 3G and 4G models.
