Qualcomm – Confident Outing

Low-balled numbers still give good growth.

• Qualcomm used its 2024 investor day to focus on the areas outside of smartphones where the diversification strategy that was laid out in 2021 is starting to bear fruit.
• It also gave some targets for its businesses outside of smartphones which, in some cases, look pretty conservative to me and could be handsomely beaten.
• The strategy is simple in that the company identifies a market vertical which is going through a dislocation such that connectivity and processing are becoming important, and then adapts its silicon and builds software to help clients deal with the dislocation.
• Qualcomm also attacks markets where vertical players use the technology barrier they have constructed to keep competition at bay and brings those barriers down with its horizontal approach.
• This is exactly what it did in smartphones and, combined with MediaTek, it has enabled the Chinese smartphone makers to dominate the Android market.
• This is currently being repeated in ADAS and I suspect that in time we will see it in The Metaverse if the segment ever takes off.
• This has worked extremely well in automotive and The Metaverse and is now being applied to both PCs and Industry.
  • First, Automotive, where Snapdragon Digital Cockpit has become an industry standard, and Snapdragon Ride is rapidly taking share from Mobileye.
  • These chipsets directly address the migration of vehicles from being hardware-defined to software-defined as well as the slow progression towards being able to drive themselves.
  • Here, Qualcomm is targeting $8bn in revenues in 2029 up from $4bn in 2026 and its $45bn pipeline covers 80% of this target.
  • Second, PCs where Windows-on-Arm finally delivers on the promise of excellent performance and great battery life rather than having to make a compromise.
  • Qualcomm now has just over 50 design wins in this segment up from around 20 when it launched which is expected to grow to 100 design wins by 2026.
  • Qualcomm estimates that 90% of laptops will be AI PCs (i.e. have an NPU) by 2029 of which 30% to 50% will be non-x86 products.
  • This gives a $4bn revenue target in 2029 which at the mid-point of these numbers and 75% share of non-x86 PCs, gives an ASP of $60 per chip which looks pretty low to me.
  • Hence, I think that there is a lot of margin for error in this estimate which is not unexpected given how uncertain the speed of change can be.
  • I see space for a big outperformance of this forecast.
  • Third, Industrial which has had some difficulty recently, but where Qualcomm now intends to perform a rinse and repeat of Automotive.
  • This will not be easy, given how fragmented and different all of the verticals are, but having Saudi Aramco as a cornerstone client is a big vote of confidence.
  • Both Honeywell and Deloitte chimed in to support Qualcomm’s Industrial offering.
  • The target for 2029 revenues is $4bn which again leaves quite a lot of wiggle room as business very rarely progresses as one expects.
  • Fourth, The Metaverse which is where I think the real risk to the forecasts lies.
  • Qualcomm contends that the ability to use natural language as the man-machine interface greatly reduces the shortcomings of using a head-mounted display which will help The Metaverse to win adoption.
  • RFM Research generally agrees with this view, but there are a lot more barriers that need to be overcome for take-off of The Metaverse and a 30m annual unit shipment target in 2029 is a punchy estimate on that basis.
  • Apple’s struggles in this market and the heavy subsidisation that is required to sell units are indications of just how immature it is and that the technology is far from ready for the market.
  • However, if it does take off, then Qualcomm is in pole position as it is pretty much the only supplier to this market and it has 100% share at the leading supplier, Meta Platforms.
• When one adds all of this up one gets $22bn in revenues in 2029 up from $8.3bn in FY2024 which assuming mid-single digit growth in handsets gives 41% of revenues in 2029 coming from non-handset sources.
• This means that the 50% non-handset revenue in 2030 is unlikely to be met, but this is an aspiration rather than a hard target and it looks like the company will get there shortly after 2030.
• I continue to think that most of these numbers have not been incorporated into financial forecasts and so I think it likely that long-term FY2027 and beyond estimates will now start to rise.
• This means that growth of 10% or better for the next 5 years looks reasonably safe and with operating expenses stable as a percentage of revenues and cash being returned via buybacks, EPS should grow somewhat faster.
• Even without further multiple expansion and upside surprises, the shares should deliver a steady return over the next 5 years leaving me very happy to sit on my position.