Qualcomm FQ1 25 and Arm FQ3 25 – Red Herrings

The red herrings of Microsoft, Google and AMD spoil good results.

• Both Qualcomm and Arm reported good results, but the weaknesses seen at Microsoft Google and AMD made investors skittish although those weaknesses have no bearing on either Arm or Qualcomm.
• Arm FQ3 25 revenues / Adj-EPS of $983m / $0.39 ahead of estimates of $947m / $0.34 and it guided fairly well for FQ4 25.
• Here, revenues / EPS will be $1.175bn – $1.275bn ($1.23bn) / $0.48 – $0.56 ($0.52) which is in line with the current consensus estimate.
• Meanwhile, Qualcomm FQ1 revenues / Adj-EPS were $11.7bn / $3.41 ahead of estimates of $10.9bn / $2.97.
• Qualcomm’s efforts to diversify the business away from smartphones continue to develop with automotive and IoT (everything else) growing by 61% and 41% YoY respectively while handsets grew by just 13% YoY.
• That being said, this is a slow process as handsets still make up 75% of revenues meaning that the fortunes of the business will be hostage to the fickle smartphone market for a little while yet.
• Qualcomm also guided well for the coming quarter with revenues / Adj-EPS of $10.2bn – $11.0bn ($10.6bn) / $2.70 – $2.90 ($2.80) which was ahead of forecasts of $10.4bn / $2.69.
• The medium-term outlook for both Arm and Qualcomm looks pretty good.
• In Arm’s favour is the transition from v8 to v9 which carries much higher royalties as well as the market share that Arm stands to gain over x86 and other processor architectures in PC, cloud, automotive, robotics and so on.
• In many of these verticals, customers do not make their own processors but take the processor design from Arm allowing Arm to earn more revenue per chip shipped.
• One can see this in the license revenues which grew by 14% YoY where new licenses represent a growing opportunity for Arm to earn royalties as customers move from design into volume production.
• In Qualcomm’s favour is its increasingly successful penetration of markets outside of handsets like laptops and automotive and other nascent opportunities such as The Metaverse and robotics.
• However, other results that went before spoilt sentiment and both Qualcomm and Arm’s failure to completely blow the roof off expectations led to the fickle market selling down their shares in after-hours trading.
• This is on the back of worries around demand for AI as both Microsoft and Google’s cloud divisions performed more weakly than expected.
• However, anyone who took the time to look at the transcripts will realise that this was not due to a lack of demand but an inability to build the infrastructure fast enough to keep up with it.
• This is a very different proposition and is an indication that the AI freight train is not slowing down but may actually be speeding up.
• This is why you are seeing the cloud providers increase their capex plans for 2025 with numbers now reaching dizzying levels.
• As suppliers into these markets, this is good news for both Qualcomm and Arm but the market failed to look beyond the surface.
• AMD’s miss was also not due to demand in my opinion but its (predictable) inability to take market share from Nvidia and so has no bearing at all on overall demand for AI or demand for Arm or Qualcomm products.
• Consequently, I think that demand should remain robust in the short-term meaning that both Qualcomm and Arm have a good shot at meeting or even exceeding the expectations that they have set.
• Hence, I continue to think that Arm can grow into its valuation while Qualcomm has the ability to expand the valuation that the market affords it through continued diversification.
• This means that there is more short-term upside in Qualcomm which is why I continue to hold it in my portfolio.