Qualcomm's Strategic Diversification And AI Innovation Propel Revenue Growth Across Sectors

Key Takeaways

• Diversification into automotive and IoT, along with significant growth in AI-driven PC markets, positions Qualcomm for revenue increases beyond traditional handsets.
  
• Focus on AI solutions across multiple platforms and strategic partnerships in emerging technologies indicates potential for increased market share and diversified income streams.
  
• Qualcomm faces financial risks from revoked licenses, reliance on AI growth, market saturation, and ambitious diversification into automotive and IoT sectors.

Catalysts

Engages in the development and commercialization of foundational technologies for the wireless industry worldwide.

• The diversification into automotive and IoT as highlighted by the substantial sequential growth in these areas, particularly the over 10 new design wins with global automakers, points towards an expected revenue increase from these sectors, diversifying income sources beyond the traditional handset market.
  
• Expansion into the AI-driven PC market with the launch of Copilot+ PCs and the subsequent strong market response, including several models sold out, indicates a potential growth in revenue from the compute sector as Qualcomm capitalizes on the significant transition in personal computing.
  
• Introduction of the next-generation Snapdragon 8 flagship mobile platform and the collaboration with major OEMs for AI-centric smartphones suggest a future uplift in handset revenues through technological innovation and meeting market demands for advanced AI capabilities.
  
• Qualcomm's focus on on-device AI solutions across various platforms, including automotive, handsets, and PCs, positions it to benefit from the growing demand for AI capabilities, potentially increasing its revenue and market share by being at the forefront of AI integration.
  
• The long-term licensing agreement signed with Honor and the positive momentum in XR, particularly with Meta's Ray-Ban smart glasses, signal potential increases in licensing revenue and further diversification of income streams through emerging technologies and new market segments.

Assumptions

• Analysts are assuming QUALCOMM's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.6% today to 26.1% in 3 years time.
• Analysts expect earnings to reach $12.7 billion (and earnings per share of $11.28) by about September 2027, up from $8.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $11.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2027 earnings, up from 20.0x today. This future PE is lower than the current PE for the US Semiconductor industry at 25.8x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.13%, as per the Simply Wall St company report.

Risks

• The revocation of the license to export products to Huawei, set to expire in late calendar '24 but revoked earlier, presents significant revenue impact risks in both the current and next fiscal quarters, affecting overall financial performance.
  
• The projection that at least 50% of PCs will be AI capable by 2027 suggests a heavy reliance on the sustained growth and adoption of AI in the computing market, which if unmet, could negatively impact anticipated revenue streams and market positioning in the PC segment.
  
• Potential market saturation or slower-than-expected growth in the premium smartphone segment could limit Qualcomm's revenue growth, especially given the company's strong position and growth expectations in this area are based on expansion and adoption of AI features in premium devices.
  
• Qualcomm's ambitious diversification into the automotive and IoT sectors, while promising, carries execution risk in scaling operations, securing new design wins, and meeting the $4 billion revenue target by 2026, potentially impacting projected revenue growth and diversification strategy success.
  
• The expectation of continual growth in the automotive revenue stream, heavily predicated on new vehicle launches and technological adoption, may face risks from slower-than-anticipated automotive market growth, changes in OEM priorities, or competitive pressures, impacting projected revenue and market share gains in this sector.

Valuation

• The analysts have a consensus price target of $217.81 for QUALCOMM based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $270.0, and the most bearish reporting a price target of just $170.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $48.6 billion, earnings will come to $12.7 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 8.1%.
• Given the current share price of $158.19, the analyst's price target of $217.81 is 27.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.