Qualcomm's diversification strategy has begun to bear fruit

Author | U.S. Stock Study Club

Qualcomm released its performance and guidance after hours on April 27, reflecting that its mobile phone basic disk has not suffered a major impact under the sharp cut of smart phones, and at the same time, the guidance beyond expectations shows that Qualcomm's diversified development strategy in the three major areas of RF front-end, automotive and Internet of Things has achieved initial results. Since the release of the earnings report, the stock price has risen by 5.1%.

Qualcomm's 21-year full-year increase was 18.98%, and its 22-year increase was -19.47%, outperforming the S&P 500 ETF (SPY: -11.66%) in the same period, outperforming the NASDAQ 100 ETF (QQQ: -20.44%) and the Philadelphia Semiconductor Index (SOXX: -22.87%) in the same period.

01 Detailed financial report: revenue, EPS exceeded expectations

Overall, Qualcomm's FY22Q2 adjusted revenue increased 40.7% year-over-year to $11,164 million (guidance $10.2-11 billion, expected $10.6 billion), and adjusted EPS increased 68.9% year-over-year to $3.21 (guidance $2.8-3, expected $2.93).

By business: Chip QCT revenue increased 52% year-over-year to $9.55 billion (expected $8.86 billion), and technology licensing QTL revenue decreased 2% year-over-year to $1.58 billion (expected $1.55 billion).

During the quarter, Qualcomm maintained strong growth in four major chip markets (YoY: +55.6% for smartphones, +28.5% for RF front-ends, +41.3% for automotive, +60.7% for IoT).

02 Trend: Competition for smartphone stocks will become increasingly fierce

Smartphone chip revenue increased 55.6% year-over-year to $6,325 million. Snapdragon is still the mobile technology platform of choice for high-end Android. In addition, Qualcomm contracted about 75% of chip orders for the high-end processor of Samsung Galaxy S22 smartphones, higher than about 40% of the Galaxy S21. The growth of sales in the high-end smartphone market is the main driving force for the more than expected growth of Qualcomm's mobile phone chip business this quarter, but as global smartphone shipments tend to stabilize, the stock competition between Qualcomm and MediaTek will become more and more intense.

Guo Mingxi had previously (April 5) revealed that China's major Android mobile phone brands cut 170 million units this year (accounting for 20% of the original shipment plan in 22 years), if consumer confidence continues to decline, orders may be reduced again in the next few months, and the inventory level of Skyworks and Qorvo RF front-end chips has exceeded 6-9 months. Since Qualcomm's main revenue comes from China, qualcomm's mobile phone business may suffer an impact below 20%.

03 The diversification development strategy has achieved initial results

Revenue from the RF Front End Division, which focuses on chips for wireless connectivity, increased 28.5% year-over-year to $1.16 billion. In the future, Qualcomm intends to translate and copy the technology accumulated in the mobile phone field to the automotive and Internet of Things fields, thereby promoting the development of diversified development strategies and opening up the company's medium- and long-term growth space.

Automotive chip revenue increased 41.3% year-over-year to $339 million, and while Qualcomm's sales in the automotive segment are relatively small at the moment, the company believes that partnerships with automakers and suppliers will drive further revenue growth in the automotive market (excluding revenue from Veoneer, which completed its acquisition this quarter).

Previously, Qualcomm and BMW, automakers and mobility providers Starantis Group reached a deep cooperation, strong cooperation, coupled with the completion of Veoneer's ARIVER responsible for the development of ADAS and other technologies on April 1, Qualcomm's first-mover advantage will be more significant, the automotive business revenue is expected to further increase. As of April 2022, Qualcomm's orders for the automotive business in hand increased by more than $3 billion from the previous quarter to $16 billion.

IoT segment revenue focused on low-power, low-cost chips increased 60.7% year-over-year to $1,724 million during the quarter due to continued demand for edge connectivity and advanced processing. Among them, consumer, edge networks and industrial sectors performed strongly, each with a year-on-year increase of more than 50%. It is worth noting that the demand for rugged handheld devices in the warehousing, logistics and healthcare industries and robotic platforms is accelerating, and the Internet of Things may take the lead in becoming qualcomm's second growth curve for revenue.

04 Conclusion

Looking ahead, management guidance significantly exceeded expectations: Qualcomm expects FY22Q3 sales of $10.5-11.3 billion (expected $9.98 billion). Among them, QCT revenue was $9.1-96 billion (driven by sales growth in the high-end smartphone market, strong demand for IoT and automobiles, and improved supply), with EBT margins of 31% to 33%, QTL revenue of $1.4-1.6 billion, EBT's margin of 69%-73%. The adjusted EPS is $2.75-2.95 (expected $2.60).

Finally, let's look at the valuation: the current NTM PE is 11.5x, which is at a 5-year low. The growth of sales in the high-end smartphone market has driven Qualcomm's revenue to exceed expectations this quarter, and the valuation has some room for repair, but the subsequent valuation rise depends on the second growth curve (the current volume is still relatively small).