Qualcomm Inc is a leading wireless technology innovator. It develops and supplies integrated circuits and system software based on 3G/4G/5G and other technologies, including radio-frequency front end (RFFE), for use in mobile devices, automotives, consumer electronic devices, and industrial devices. Its segments include the QCT (Qualcomm CDMA Technologies) semiconductor business and QTL (Qualcomm Technology Licensing) business. The revenue mix breakdown in FY22 was handset: 65%, QTL (licensing): 14%, IoT: 17%, and automotive: 3%.
Investment Overview
Leading communications semiconductor & solutions company. QCOM is a beneficiary of the growing 5G opportunities in the premium handset, automotive, IoT, and edge networking segments. Recently announced product line-up as well as its blue-chip customer bases attest to its competitive edge in each of the respective sub-sectors, e.g., Apple and Samsung in handset; Mercedes and BMW in automotive; and partners like Windows and Microsoft in IoT. Inroads into 1) Gen AI through Snapdragon as well as 2) PC chips market are further positive developments to watch.
Diversification away from handset to more stable, fast-growing sectors. Recently announced extension of Apple partnership to 2026 ensures earnings visibility for the handset segment. Looking further, QCOM looks to diversify its business into the non-handset segments to (i) offset cyclicality associated with the global smartphone industry, and (ii) tap into areas of higher growth potential. Management has guided for a lofty US$4bn/US$9bn revenue target in FY26F/30F, respectively, up from the US$434m reported in Q3FY23. Revenue contribution from handset is expected to reduce from 65% in FY22 to c. 49% in FY27F as a result of (i) diversification, and (ii) faster growth in non-handset segments – consensus sees 5-year 2022-27F revenue CAGR of 8% and 31% for IoT and automotive segments, respectively.
Stability in consistent capital return policy. We have a positive view on QCOM's strategy to strongly position itself in the QCT business, diversify into fast growing segments, improve operating efficiency, and obtain stability in the licensing business. QCOM's consistent capital return policy shines among the cyclical, low-yielding semiconductor industry. The company continues to grow its dividend per share each year, with a trailing 2% dividend yield at May-24 levels.
We upgrade QCOM to BUY rating with higher TP of USD210 per share (prev. USD145.30), pegged at 8X P/BV, slightly higher than 3-year average of 7.5x. Signs of recovery that we have been waiting for – in the key smartphone segment and China handset market – were more evident in its latest 2QFY24 results. We are encouraged by QCOM 1) strong competitive positioning in the global smartphone industry, and 2) ability to defend its market share in China. Boasting a strong pipeline of AI-smartphones and -PC, QCOM’s potential in the fast-growing AI-ecosystem is another positive tailwind to watch.
Risks
Risks include (i) weaker-than-expected outlook for smartphones (65% of FY22 revenue), and (ii) slower-than-expected recovery in China’s demand (c.60% of revenue).
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