Qualcomm: Served Available Market To Drive Significant Growth

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Qualcomm (QCOM) reported FY Q1 2022 earnings on February 2, 2022. Shares fell more than 7% to $173.60 in extended-hours trading, after rising more than 6% during the regular session.

For the period ending December 26, 2021, Qualcomm said it earned $3.23 per share on $10.7 billion in revenue, up 30% year-over-year. A consensus of Wall Street analysts expected Qualcomm to earn $3 per share on $10.43 billion in revenue during the period.

For the second quarter, Qualcomm said it expects to generate between $10.2 billion and $11 billion in revenue, with earnings coming in between $2.80 and $3 per share. Analysts expected the company to earn $2.48 per share on $9.54 billion in revenue.

Earnings and guidance were strong, but the company is facing some headwinds as it seeks to prove itself as a technology company migrating away from a smartphone-centric model to other applications that could use its Snapdragon processor.

QCOM stock

YCharts

Chart 1

At its previous FY Q4 2021 earnings call on November 3, 2021, shares climbed almost 6% in after-hours trading as Chief Executive Cristiano Amon said that snapdragon continues to be the preferred choice for premium and high-tier Android smartphones in all regions. More importantly, Amon noted that

“We also demonstrated revenue diversification with combined, our RF Front end, automotive and IoT fiscal ’21 revenues exceeding $10 billion, an increase of 69% year-over-year.”

Thus, the run-up in QCOM stock in November was a result of the company’s statement of movement from smart-phone centricity to new applications, while still noting that its smartphone sales were dominant.

Qualcomm Q1 FY22 Analysis

Chart 2 shows YoY Q1 2022 revenues by QCOM application. Handsets represented the largest revenues and strongest growth of 42% to $6.0 billion.

RF Front End (“RFFE”) growth was just 7%. While revenue was strong at $1.1 billion, competition is strong, as Murata (OTCPK:MRAAY), Skyworks (SWKS), Broadcom (AVGO), Qorvo (QRVO) and Qualcomm share almost 80% of the overall business. According to EverythingRF, there are 43 Front End Module manufacturers in the market. The IoT (Internet of Things) exhibited strong growth of 41% to revenues of $1.5 billion.

Qualcomm businesses

Qualcomm

Chart 2

The data in Chart2 above are based on YoY growth of the quarterly sales. However, they are very different based on QoQ revenues. As shown in Table 1, QoQ revenues in RFFE dropped in Q1 2022, from $1,237 million in Q4 to $1,132 million in Q1, a drop of 8.4%

Qualcomm revenue by businesses

Qualcomm

Likewise QoQ revenues for IoT also dropped, from $1,540 million in Q4 to $1,476 million in Q1, a drop of 4.1%. Automotive QoQ revenues decreased from $270 million in Q4 to $256, a drop of 5.2%.

The really strong growth remains in QCOM’s core business – Handsets. Revenue increased from $4,686 in Q4 to $5,983 million in Q1, an increase of 27.7%.

Qualcomm Revenue Streams

Handsets

The global smartphone applications processor market grew 17% to $8.3 billion in CY Q3 2021, with Qualcomm and MediaTek (OTCPK:MDTKF) the leaders, as shown in Table 2. The market was $7.4 billion in CY Q3 2020, ending 2020 with 25% growth to $25 million.

Qualcomm’s market share has been flat, while Mediatek’s share has gained from a drop in Huawei’s business due to US sanctions. China IC designer Unisoc also more than doubled its market share in the period.

Global smartphone application processor market share

Qualcomm

Qualcomm’s relatively flat market share in the period means that revenue growth is dependent on overall processor growth and not on its share gains. On a positive note, Qualcomm has two-year customer commitments for premium and high-tier handsets across all of is main customers – Xiaomi (OTCPK:XIACF), HONOR, Vivo, and OPPO. Qualcomm also has design wins across all of 2022 for Samsung’s (OTC:SSNLF) new flagships and new form factors including the Fold Series and the Flip Series.

Qualcomm’s 5G chips power the latest Apple (AAPL) iPhones. Reports of Apple working on its own 5G modem have repeatedly hit QCOM stock.

For calendar 2021, Qualcomm estimates global 3G, 4G, 5G handsets grew 7% YoY, including approximately 535 million 5G handsets, representing 40% of all handsets. For calendar 2022, the company forecasts that more than 750 million 5G handsets will be sold, as shown in Chart 3. In 2024, more than 1,100 5G handsets will be sold, and 5G will represent 85% of all handsets.

Qualcomm 5G handset shipments

Qualcomm

Chart 3

Automotive

The Snapdragon Ride Vision System – a new open, scalable, and modular computer vision software stack built on a 4nm process technology system-on-chip (SoC) designed for an optimized implementation of front and surround cameras for advanced driver assistance systems (“ADAS”) and automated driving.

Most autonomous vehicles employ a system of cameras, radar, laser sensors and other technologies to assess road conditions and adjust driving behavior. These vehicles might have adaptive cruise control, traffic lane adjustments and automatic braking, steering and acceleration.

At present, there are numerous competitors in the automotive AI chip market, presenting headwinds to Qualcomm, including Intel (INTC) and Mobileye, Nvidia (NVDA), Tesla (TSLA) and Chinese companies Huawei, Horizon Robotics, Black Sesame Technologies, and Xin Chi Technology.

Qualcomm sees its chief competitor in the ADAS space as Mobileye. Most other ADAS suppliers provide black-box sensor packages requiring the automaker to handle integration into their own ADAS system architecture. Snapdragon Ride Platform integrates the whole system, offering optional add-on extras like crowd-sourced mapping. GM’s current Super Cruise system and the forthcoming Ultra Cruise door-to-door automated driving system, expected in 2023, employ Qualcomm’s Ride Platform.

Qualcomm’s automotive business is thriving; growing more than 50% YoY and touched almost a billion dollars in realized revenues last fiscal year ending September 2021. Qualcomm is working with 25 global OEMs that have selected Qualcomm platforms.

With the acquisition of Arriver, the company is very well-positioned for ADAS, as described above. Chart 4 shows that Qualcomm’s SAM (served available market) will grow at a CAGR (compound annual growth rate) of 36%, growing from $3 billion in 2021 to $15 billion in 2026.

Qualcomm served available market

Qualcomm

Chart 4

The connected car will also benefit Qualcomm’s licensing business, which is growing 10% YoY to $1.82 billion (17% of total revenue). Qualcomm has been licensing independently in the automotive space since GM (GM) started OnStar, which uses GPS satellite and cellular technology to link the vehicle and driver to the OnStar Center. GM announced that its upcoming “hands-free” Ultra Cruise driver assist system will use two of Qualcomm’s Snapdragon chips in the 2024 Cadillac Celestiq electric sedan, which will be the first ADAS to use Qualcomm’s new Snapdragon Ride Platform.

And so, hundreds of millions of licensed connected automobiles, connected units on the road, are licensed to Qualcomm at $5 per connected unit or connected vehicle.

IoT

I’ve never been a fan of the term IoT (Internet of Things) because it includes everything that is connected to the Internet, and that’s most things. Thus, in its exuberance to spin off its Snapdragon to a non-handset-centric capability, Qualcomm lumps a plethora of applications in this Revenue Stream outside handsets, automotive, and RFFE (the subject of a future article).

Chart 5 shows Qualcomm’s SAM for IoT, growing from $42 billion in 2021 to $67 billion in 2024 at a CAGR of 17%. Qualcomm’s $5,488 million in revenues in IoT in CY2021 means the company estimates its share in this business is 13%. Assuming that share stays the same, IoT could be an $8.71 billion market in 2024 for QCOM.

Qualcomm served available market for IoT

Qualcomm

Chart 5

Qualcomm remains focused on “connected intelligent compute” at the edge and is the core of the company’s product roadmap. Edge computing means running fewer processes in the cloud and moving those processes to local places, such as on a user’s computer, an IoT device, or an edge server. Bringing computation to the network’s edge minimizes the amount of long-distance communication that has to happen between a client and server.

Although Qualcomm made its name in the mobile computing space with its Snapdragon line of chips, the focus is on building high-performance server chips specifically designed to accelerate AI inference, both in the cloud and at the edge. Manufactured on a 7nm process, the company’s latest Cloud AI 100 accelerators lead the market in both performance density and energy efficiency, per MLPerf benchmarks.

Investor Takeaway

While YoY growth provided by QCOM was strong , QoQ growth listed in Table 1 above was weaker. But long term, Qualcomm’s SAM was $95 billion in 2021 and is expected to reach $145 billion in the next couple of years at a CAGR of 15%. That should drive significant growth in the following years, as shown in Table 3.

Qualcomm served available market by revenue streams

Qualcomm

Chart 6 shows COM stock over a 5-Year period. Compared to the S&P Technology Index (IXT). The Price % Changes are nearly identical and have tracked except for more volatile peaks and valleys of QCOM.

QCOM stock price

YCharts

Chart 6

Chart 7 shows QCOM’s Profit Margin for a 5-year period. Profit margin has been flat for the past three years following negative margins in 2018 as the company reported a loss of $5 billion due to its dispute with Apple.

Qualcomm profit margin

YCharts

Chart 7

The low PE Ratio shown in Chart 8 suggests QCOM is a buy at 20.6x compared to the US Semiconductor industry average (25.4x).

QCOM P/E ratio

YCharts

Chart 8

According to Seeking Alpha’s Factor Grades, Qualcomm has increased in Momentum and Revisions, but decreased in Valuation in the past three months, as shown in Chart 9.

QCOM stock grades

YCharts

Chart 9

QCOM has an incredible Seeking Alpha Quant ranting of 1 out of 64 in the Semiconductor Industry and 1 out of 569 in the Information Technology Sector.

Semiconductor stocks are down about 10% in the past 1-month period and Qualcomm is doing better, down only 4%, following increasing hints from the Federal Reserve that the central bank will take aggressive action to slow down the jump in consumer prices. Concerns about persistent inflation, supply chain disruptions from new Covid variants and the potential for conflict in Ukraine are other factors that have weighed on the risk appetites for investors.

Semiconductor stocks are trading as a sector rather than individual stocks, and the movement is due to macro factors outside these stocks. With that in mind and the associated uncertainty of these factors, investors need to take a wait-and-see attitude on whether to invest in Qualcomm.

There are few technology headwinds against Qualcomm but many tailwinds. I would be on the sidelines with these stocks at this time.

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