Qualcomm FQ4 & ARM FQ2 – Story of Two Halves

Qualcomm FQ4 24 – Top Gear.

• Qualcomm reported good results that beat expectations as a result of a strong performance in automotive, providing the first piece of hard evidence that the diversification strategy is beginning to bear fruit.
• FQ4 24 revenues / Adj-EPS were $10.2bn / $2.69 nicely ahead of expectations of $9.91bn / $2.56 and there was more good news in the guidance.
• FQ1 25 revenues / Adj-EPS are expected to be $10.5bn – $11.3bn / $2.85 – $3.05 again nicely ahead of expectations of $10.5bn / $2.86.
• While the strength of the guidance for FQ1 is mostly driven by China handsets, the story of the numbers delivered is undoubtedly automotive.
• Here, FQ4 revenues were $899m nearly 10% above the consensus forecast of $816m and a further 50% YoY growth in revenues is expected in FQ1 25 despite the weakness that most of the automotive industry is currently struggling with.
• This is made possible by market share gains, where many OEMs will reluctantly concede that Qualcomm is now the standard for automotive infotainment and is doing well in advanced driver assistance (ADAS).
• The outlook has also been strengthened by Qualcomm’s return to using in-house processor designs after a decade of using Arm’s own design.
• At Snapdragon Summit, Qualcomm introduced the 8 Elite for smartphones, the Cockpit Elite and the Ride Elite for automotive all of which use the custom Oryon CPU.
• As one would expect, this delivers a step-wise change in performance and power efficiency which has been well received by clients and has resulted in an acceleration of flagship device launches.
• The travails of Samsung with its Exynos processor (see here) will also have done no harm to the outlook for FY25.
• The net result is that the diversification strategy is on track and if China continues to see some economic recovery as a result of the stimulus, the stage is set for a good fiscal 2025.
• Following the 8% increase in the shares in after-hours trading, Qualcomm is trading on 16.6x FY2025 PER and I still see space for both the multiple and the earnings to increase from here.
• Hence, I remain happy to hold my position in Qualcomm as I think that there is plenty more to come.

Arm FQ2 25 – Meaningless Wobble

• Arm reported good FQ2 2025 results but failed to raise guidance for the coming quarter which caused some disappointment but in the grand scheme of things, this means absolutely nothing.
• FQ2 25 revenues / Adj-EPS were $844m / $0.30 nicely ahead of estimates of $810m/ $0.26 driven by growth in royalty rates as the industry shifts from v8 to v9.
• This is a crucial short-term revenue driver as royalty rates on v9 are much higher than v8 meaning that revenues can still grow, and margins expand even if the market stagnates.
• The recovery of its current arch-enemy and large customer, Qualcomm has also clearly helped as its success in diversifying its customer base also directly benefits Arm.
• Guidance was in line with expectations with FQ3 revenues / Adj-EPS of $970m – $970m / $0.32 – $0.36 in line with estimates of $951m / $0.34 which caused slight disappointment.
• This was not meaningfully translated in the share price which fell by only 5% in after-hours trading.
• For a low-growth industrial company, this is a big move but for a company trading on FY2025 PER of 88.1x, this is a tiny blip.
• When companies with these sorts of valuations disappoint the market, the move is typically 15% or more.
• The short to medium story for Arm remains pretty much intact in that the mix shift to v9 and the market share gain in automotive and with Nvidia and other chipmakers in the cloud remains on track.
• However, the real potential lies in inference at the edge, which RFM has identified as an opportunity that could be larger than training in the cloud.
• This has not emerged to any real degree in calendar 2024 as the focus has remained on training in the cloud with inference yet to emerge in any meaningful way.
• Arm is in a good position to benefit alongside its customers as this occurs which is why I continue to think that shareholders of both Qualcomm and Arm will be best served by ending the dispute and working more closely together.
• In this regard, I think that Arm does have a case and I think that there is a good chance that the current court case will settle before the end of the year at a rate lower than Arm is seeking but higher than what Qualcomm is currently willing to pay.
• This will give some upside to Arm’s estimates and help the company continue to grow into the AI-like valuation that has been afforded to it following the IPO.