By Jack Hough
When Cristiano Amon was made CEO of Qualcomm in summer 2021, he had a wooly chin and mustache. During a recent visit with Barron's, his cheeks were filled in, too. To get the stock price growing, he must now repeat with computer chips what he has done with facial hair: expand richly into new areas. The details of how quickly that can happen are fuzzy.
Chip-making today is the star of Wall Street, but that is mostly to do with Nvidia, the artificial-intelligence world beater, up 185% just this year. The broader PHLX Semiconductor index, which tracks Nvidia but also companies that make chips for more workaday purposes, is trailing the S&P 500 index. Its worst performer is fallen giant Intel, down 51%, which is losing market share in both data centers and personal computers.
On that spectrum, Qualcomm is somewhere in the middle, up 10% this year, and 17% since Amon took over, trailing the S&P 500 in both cases. "Because a lot of our revenues, the majority of our revenues, is mobile, we get mobile multiples," says Amon. "It's one of the largest consumer electronic markets in the world, but it doesn't grow, because all of us have a phone."
This is part of the problem. About 75% of Qualcomm's revenue today comes from cellular handsets, including central processors and connectivity chips. Slow growth there helps explain why Qualcomm trades at less than 15 times projected earnings at a time when Nvidia goes for more than 50 times. Another problem is that some handset makers like Apple and Samsung Electronics have enough financial and manufacturing heft to produce more components in-house. Next year, Apple will drop Qualcomm for 5G chips in two new iPhone models.
"We estimate a more than $15 billion drag from Apple/Samsung share loss, making it difficult to model top-line growth over next three years," writes Oppenheimer analyst Rick Schafer, who has a neutral rating on the stock. Amon pushes back against this. "We're not losing share on Samsung, " he says. As for Apple, he points out that Qualcomm has defied estimates for revenue declines there for years, and is now in a position to grow even when its Apple orders shrink.
This was the theme of Qualcomm's investor day presentation this past week. A slide deck led off with the phrase "Enabling intelligent computing everywhere." If I had to write a subhead to bottom-line things for shareholders, it might have been, "Getting some AI stink on the stock."
In handsets, Qualcomm has had success with its Snapdragon platform, which combines central processing, connectivity, local AI processing, and more on a single, low-power chip. The latest version has helped the company grow revenue from Android-based devices by 20% year over year. Now, the goal is to grow outside of handsets fast enough to bring their contribution to total revenue down to 50% by 2030.
The largest opportunity is in cars, which get a Snapdragon platform of their own that can run cabin infotainment, connectivity, and active safety features, while leaning on AI where it's needed.
Management claims a "design-win pipeline" there of some $45 billion -- notable for a company whose total revenue for the fiscal year ended in September was just under $39 billion, up 9%. Alas, not all of that pipeline will hit the top line soon. The forecast is for just over $4 billion of automotive revenue during fiscal 2026, rising to $8 billion by fiscal 2029.
By then, management estimates another $14 billion in revenue, up from $5.4 billion now, for what it calls the Internet of Things. This includes PCs, factory robots, mixed reality headsets, ear buds, Wi-Fi boxes, and much more. Part of this rests on AI expanding the need for edge computing, where more of the hard thinking is done on local devices, rather than in the cloud. Amon gives the example of Microsoft Copilot and a feature called Recall, which can conjure up a snapshot of just about anything a PC user has seen on the screen.
On phones, Amon says, having AI running all of the time at the edge means the computer will now understand human language. "It changes how you fundamentally think about what an application is," he says. For banking apps, for example, "you could have an AI that knows the credentials for your bank, and you just ask, 'Where's my balance? I took a photo of this bill -- can you pay this bill for me?' "
If Amon is right about the promise of edge computing, then PCs and phones could be headed for massive upgrade cycles. But when? Even the bulls aren't quite sure.
"Qualcomm needs to take share in these markets, and these markets need to develop to support Qualcomm's long-term targets, of which the pace and magnitude is uncertain," writes BofA Securities analyst Tal Liani. He nonetheless rates the stock at Buy with a price target of $245, a whopping 56% above recent levels. The target works out to 22 times Liani's earnings projection for the year ahead. The rise in multiple is warranted, he reckons, because of the dependable, high-margin royalties Qualcomm collects for its connectivity technologies, and also because it's a potential beneficiary of the shift toward edge computing.
In Liani's AI pecking order, Qualcomm deserves to trade at a handsome premium to Intel, because its power-efficient, Arm-based chip designs are particularly well suited to edge computing. But it doesn't deserve to trade quite as richly as companies that are closer to the AI data center, including Advanced Micro Devices, Broadcom, and, of course, Nvidia.
"I am convinced we have an inflection point right now," Amon says of the new, marvelous things that phones, cars, and smart glasses will do. Shares dropped 6% after the investor day presentation, suggesting that some of the audience is holding out for more proof.
Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.
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(END) Dow Jones Newswires
November 22, 2024 10:05 ET (15:05 GMT)
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