Qualcomm FQ1 24 – On the up

Apple remains toothless.

• Good results combined with further confirmation that Apple is in no position to restart its patent fight with Qualcomm, result in a company with good short and long-term prospects trading at a reasonable price.
• FQ1 24 revenues / Adj-EPS were $9.9bn / $2.75 ahead of estimates at $9.5bn / $2.37 which combined with a steady outlook confirms that the consumer device chip inventory correction is now behind us.
• FQ2 revenues / adj-EPS will be $8.9bn – $9.7bn ($9.2bn) / $2.20 – $2.40 ($2.30) broadly in line with consensus at $9.3bn / $2.23.
• Both smartphones and automotive performed well with the party being somewhat spoilt by a 32% YoY decline in chip sales to IoT customers.
• This is not wholly unexpected given that the inventory correction in the industry has shifted from consumer to industrial and this has already been flagged by both Qualcomm and its competitors.
• The licensing business also remains on solid ground with 2 Chinese smartphone vendors extending their contracts and Apple being forced to extend until 2027.
• This means for the next 3 years, there are no real patent disputes on the horizon greatly reducing the scope for negative news flow from grumpy clients filing lawsuits in order to get discounts.
• I also continue to think that Apple’s attempts to create its own 5G modem are a disaster area.
• RFM research has concluded that Apple is really struggling with the modem software and power consumption in the transceiver and is still not in a position to pass carrier qualification.
• Internal roadmaps point to another attempt to pass carrier qualification in H1 2024, but I suspect that this will get delayed yet again.
• I am very doubtful whether Apple will be ready with a modem to power the iPhone in 2027 meaning that it will be forced to negotiate yet another contract with Qualcomm.
• One possibility is to source a custom modem from someone else such as MediaTek which has come a long way in the last few years and now makes high-quality products and sits just behind Qualcomm in my opinion.
• However, this would still not free Apple to re-initiate its patent fight against Qualcomm as there are agreements in place about the usage of Qualcomm IP in 3^rd party products requiring end customers to be licensed.
• Hence, I think that Apple will be buying modems from Qualcomm well beyond 2027 although we may see an inhouse modem appear in a tablet or iPhone SE product as a test.
• Qualcomm has been pretty conservative in terms of how it guides for Apple revenues and so I think that there is upside to be had here.
• Furthermore, the pipeline for automotive with high-value processors for both ADAS and digital cockpit looks excellent and when these vehicles hit the market, automotive should see a big leg up which again is not fully reflected in the numbers.
• Finally, Qualcomm also has the potential to take a large piece of the laptop market from Intel as the performance and power consumption numbers for its X Elite series launched in 2023 are almost as good as Apple’s M3.
• This comes with the gigantic caveat that Microsoft executes the port of Windows from x86 to Arm flawlessly as anything else will result in the proposition flopping badly.
• I would hope that Microsoft has learned how to do this after failing twice and being made to look incompetent by Apple’s superb execution of this transition.
• The reality is that there is no way of knowing until we can get our hands on a device and thoroughly test it but if it works, there is substantial upside for Qualcomm to take a lot of share from Intel.
• Once again, none of this is in the numbers and Qualcomm is being extremely conservative about its outlook in this segment.
• The net result is that as long as smartphones can stay stable, there are multiple places where Qualcomm can grow revenues and profits and the indications are that these strategies are working.
• The easy money in Qualcomm has been made with the recent rally from $106 (where I picked it up) but when considering taking profits, I have concluded that there is more upside.
• The shares are no longer a bargain but at 15.2x 2024 and 13.8x 2025 PER (which will be lower if any of these new strategies pay off), I am very happy to hold on as I am sure there is more to come.