Qualcomm FQ4 2020 – Happy wave.

Finally, a wave to be pleased about.

• Qualcomm reported excellent results as the combination of Apple and China is driving a rapid roll-out of 5G enabled devices which is a technology where Qualcomm (as usual with a new radio technology) has the commanding position.
• FQ4 2020 revenues / EPS were $6.5bn / $2.58 nicely ahead of consensus at $5.9bn / $2.23 and above the top end of the rage which Qualcomm had guided for 3 months ago.
• Guidance was also very strong with revenues / Adj-EPS of $7.8bn – $8.6bn / $1.95 – $2.15 well ahead of consensus at $7.1bn / $1.65.
• Not surprisingly the shares rallied around 12% in after-hours trading.
• The main driver without any shadow of a doubt is the wave of 5G roll-out which is progressing more strongly than I, and many others, have expected.
• There are two main drivers are:
  • First, Apple: The iPhone 12 and its variants are all 5G enabled.
  • This means that regardless of whether the consumer wants 5G or not if he or she wants a new iPhone they will get 5G anyway.
  • The main draw of the iPhone 12 is in the usual areas such as the screen, processing power, camera and photographic performance as well as its new design.
  • Hence, while it is these factors that will compel users to make the upgrade, 5G and Qualcomm get to piggy-back on that demand.
  • This is also a very positive sign for 5G in general because as the 5G coverage becomes more widely available, the market will have already been seeded with phones that can use it.
  • Hence, the transition to using 5G will be almost invisible to the consumers and the scene will be set for new services that can make the most of the lower latency and much faster download speeds.
  • What these services are remains unclear but in 4 generations of mobile radio technology, the services have always appeared to fill the space provided.
  • Second, China: China is very keen to lead the race to 5G and as such, a high proportion of smartphones that have shipped this year are 5G-enabled.
  • Qualcomm is pretty well-positioned with the smartphone vendors in China and with the probability that that Huawei starts to struggle in China, this position could strengthen further.
• Hence, the appeal of the new iPhone and the push to 5G in China is driving 5G harder than many expected, and Qualcomm is well-positioned to ride that wave.
• The other area that helps is the RF-front end.
• This is the part of the phone that is responsible for receiving and transmitting radio signals to and from the smartphone as well as converting from analogue to digital and back again.
• With the number of frequencies and standards that need to be supported increasing, this part of the system is becoming increasingly difficult to get right.
• Qualcomm has put a lot of effort here in the fiscal year gone, $2.4bn in revenues came from selling the components and software to manage this piece of the smartphone.
• I think that technical excellence in this area is increasingly important and as others catch up on the 5G radio chip itself, this could help Qualcomm defend market share and show superior radio performance in challenging conditions.
• The outlook for Qualcomm is pretty good as its operations have migrated well to working at home and its end markets are seeing good demand.
• The valuation is high but not in nosebleed territory making this one to hang onto if one already has it.