We're Trimming Our Price Target for This Holding Amid Multi-Year Revenue Plan

In our alert earlier on Wednesday, in which we picked up more shares of Universal Display OLED, we discussed the role of expanding end-market adoption for organic light-emitting diodes and why that should be beneficial to Universal’s business and our shares over the medium-to-longer term. Tuesday, at its 2024 Investor Day, Qualcomm QCOM management did something similar, sharing multi-year targets for its handset, automotive and IoT businesses. These businesses stand to benefit from continued mid-single-digit growth in the Android ecosystem as well as share gains in the case of handsets, and the matriculation of design wins for the automotive and IoT businesses.

As we suspected would be the case, Qualcomm aimed to show how, over the next few years it will reduce its reliance on the smartphone market (75% of fiscal 2024 sales) to roughly half of its sales mix by 2029. Over the course of those years, Qualcomm will contend with the ramp-down and expiration of its current contract with Apple AAPL. This is not a new development, and we would argue it was at the heart of Qualcomm’s event as management explained how the company aims to grow its reach into the 50 billion connected devices it sees being sold across the 2024 to 2030 period. To put some other figures around that, Qualcomm estimates its total addressable market across smartphones, IoT (PCs, tablets, AR/VR, industrial and other connected devices), and automotive is around $900 billion.

These are big numbers, but the question we have to consider is how well-positioned Qualcomm is on that path. Some of the answers were furnished across Tuesday's event as management discussed its handset, automotive and IoT targets.

In handsets, as discussed before, Qualcomm will focus its efforts on the Android ecosystem, which is pretty much everyone but Apple. According to data from Canalys, that’s 82% of the smartphone market and it is expected to grow mid-single digits over the next few years due to AI, improved camera, memory and processing power needs drive an upgrade cycle.

Qualcomm’s automotive design win pipeline stood at $45 billion, up from $30 billion two years ago, and the ramp in those programs provides 80% revenue coverage for the company’s revenue targets over the next few years. These wins span infotainment, connected cockpit and advanced driver assistance system (ADAS) applications. Management targets $4 billion during its fiscal 2026, up from $2.9 billion over the last 12 months, and $8 billion by 2029.

Turning to Qualcomm’s IoT business, which as you saw above houses several connected device opportunities, management laid out specific revenue targets that, when tallied, point to $14 billion in revenue by 2029. That compares to $5.4 billion over the last 12 months. The two biggest drivers of this are its $4 billion PC opportunity it aims to tap with its 58 platform wins that should translate into shipping models over the next two years, and industrial IoT applications, which is another $4 billion opportunity.

One of the other IoT segments discussed by Qualcomm was the XR or spatial computing market, which includes Meta’s META Ray-Ban smart glasses as well as efforts by Samsung, Alphabet GOOGL and others. Of all the market opportunities discussed on Tuesday, it’s this $2 billion one by 2029 that brings us the greatest pause. While folks are digging Meta’s Ray-Ban smart glasses, our question stems around the timing of mass adoption or whether it will be the latest new wearable tech that doesn’t live up to the hype. Time will tell, but for now, we’ll take a conservative view on this.

Rounding out the $14 billion 2029 opportunity is $4 billion tied to networking, tablets, headphones and smartwatch applications, which Qualcomm already plays in.

Assembling the Revenue Pieces

Putting the dollars together, Qualcomm targets growing what it calls these diversification revenue streams by $13.7 billion to $22 billion over the next five years. The long-term target is for 50% of overall revenue to come from IoT and automotive with the other half from handsets. The math means the handset business is expected to be around $22 billion as well compared to the $24.9 billion it accounted for over the last 12 months. That step down is the result of Qualcomm’s Apple business winding down over the next few years versus share gains in the Android ecosystem.

The Market’s Reaction and What We Think

The reaction we’re seeing in the market on Wednesday for Tuesday's presentation is what we would call “wait and see." But let’s think about a few things.

Back in late January of this year when QCOM shares were trading near where are now, BMW had already announced working with Qualcomm for its in-vehicle digital operating systems. To that we can add Mercedes-Benz and others that made video testimonials during Tuesday's event as well as that $45 billion pipeline that offers significant revenue forecast coverage for $8 billion in targeted auto revenue by 2029.

It wasn’t until mid-year that Qualcomm marked its foray into the PC market with 28 design wins and that has since expanded to 58, which should come to market over the next several quarters.

At that time in late January, Apple had just extended its modem licensing deal with Qualcomm through March 2027, establishing that line in the sand.

Compared to back then, we have a clearer picture of where Qualcomm is taking its business and how it intends to get there. Could there be timing issues and other developments that result in a longer timetable for some of these targets?

Certainly possible, but when we look at the drivers behind increasing chip content and connectivity across the auto and IoT markets, Qualcomm is leveraging its strong position in the low-power, high-processing and high-connectivity handset market. We see that position making Qualcomm a formidable player as these devices embrace its technology stronghold.

The key to QCOM shares will be progress posted by Qualcomm toward these multi-year goals but also what we see in the marketplace as new auto, PC and other device models are brought to market. We will be watching for progress with both as well as Qualcomm delivering on its pledge to grow its dividend in the mid-single digits going forward and funnel excess free cash into its buyback program.

Adjusting Our QCOM Price Target

While we have enough to see QCOM shares hitting our $255 price target should management deliver on its multi-year targets, you know us as prudent investors and that means even after knowing what we now know, we will temper the company’s outlook with some caution. In doing so, we will reduce our long-term price target for QCOM shares to $200. Not a small chop, but as Qualcomm executes on its multi-year vision, we will revisit our price target as needed. And if you think we are being overly bullish, we’d share that BofA reiterated its $245 price target for QCOM shares on Wednesday morning.

Even after our price target cut, there is ample upside to maintain our One rating on the shares. As they settle out from Wednesday's market reaction, we’ll plot our next move noting that at roughly 3.25% of the Portfolio’s assets, we have some room for some additional shares.

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