Benefiting from the mobile phone side AI, Qualcomm's second-quarter results and next quarter guidance exceeded expectations, rising 5% after hours Financial reports

After the U.S. stock market on Wednesday, May 1, Qualcomm, a technology company that designs and manufactures semiconductors, services and software related to wireless technology, and has recently entered AI chips, released its results for the second quarter of fiscal year 2024 (i.e., the first quarter of the 2024 calendar year).

Qualcomm's fiscal second-quarter results were better than expected across the board, and guidance for the next quarter was also positive, benefiting from the wave of demand for AI chips in smartphones and PCs, and revenue growth in the next quarter will even accelerate, driving the stock up 5% after hours.

Qualcomm closed down 1% on Wednesday, falling from a two-week high for two consecutive days, and has risen more than 13% this year, significantly outperforming the S&P market's 5%, the Nasdaq's 4%, and the Philadelphia Semiconductor Index's nearly 8%, and Qualcomm's 41% rise in the past 12 months.

Since last November, Qualcomm's stock price has shown a steady upward trend, and Wall Street has been optimistic ahead of the earnings report, with its profitability forecast being raised the most times. Over the past three months, 15 analysts have rated "Buy", 10 have "Hold" and one have recommended "Sell", however, the average price target of $171.27 represents "only" 3% upside.

Qualcomm's second-quarter revenue increased 1% year-on-year, EPS increased 13% and exceeded the upper limit of the guidance, and the device-side AI made the next quarter guidance exceed expectations

With multiple factors such as the moderate recovery of the global smartphone market, the accelerated adoption of 5G, and the effectiveness of Qualcomm's diversified revenue strategy to shift to AI-driven demand, the market expects the U.S. chip design company's revenue to increase year-on-year and slightly exceed expectations.

According to the financial report, Qualcomm's revenue in the second fiscal quarter (that is, the first quarter of this year) increased by 1% year-on-year to $9.39 billion, slightly higher than the market expectation of $9.32 billion, and weaker than the revenue in the fourth quarter of last year, which increased by 5% year-on-year to $9.94 billion, and fell by nearly 17% year-on-year in the first quarter of last year.

Adjusted EPS of $2.44 per share was above the consensus of $2.32, up 13.5% from $2.15 a year ago and also weaker than the adjusted EPS of $2.75 per share in the fourth quarter of last year.

However, these are in line with the official guidance provided by the company. Qualcomm had expected revenue in the range of $8.9 billion to $9.7 billion for the fiscal second quarter, and adjusted earnings per share in the range of $2.20 to $2.40, which means that actual quarterly EPS exceeded the upper end of official guidance.

Qualcomm expects sales in the second quarter of the calendar year to be between $8.8 billion and $9.6 billion, the midpoint of which is higher than Wall Street's expectation of $9.08 billion, or a significant acceleration of year-over-year growth to nearly 9%. The company expects EPS of $2.15 to $2.35 per share for the next quarter, also above the consensus of $2.16, which, combined with a better-than-expected quarterly report, helped drive the stock higher in after-hours trading.

Some analysts said that the guidance for next quarter exceeded expectations, suggesting that the recovery momentum of the global smartphone market this year is good, and most of the contribution may come from the end-side AI field that Qualcomm is betting heavily on.

Cristiano Amon, the company's president and CEO, said that it has achieved record high automotive chip revenue for the third consecutive quarter, and is also about to launch the Snapdragon Snapdragon X platform and achieve leading end-to-end AI capabilities in multiple product categories.

Qualcomm also said there is strong demand for its products from "high-end" or "AI-driven" smartphones that require state-of-the-art chips. Some of the leading OEMs have launched the first generation of flagship Android smartphones with end-to-end AI capabilities, including Chinese manufacturers:

"We benefit from our customers' desire to enable AI on their end devices. ”

Sales of automotive chips hit new highs for three consecutive quarters, and revenue from mobile phone chips continued to increase year-on-year, raising dividends for more than two consecutive years

In terms of business, Qualcomm's main business is divided into two major segments: semiconductor business (QCT), which focuses on chip products, and technology licensing business (QTL), which is responsible for intellectual property licensing. Among them, the QCT segment is its main source of revenue, which is composed of three major segments, namely mobile phone terminal chips, which account for the highest proportion of revenue, emerging and fastest-growing automobiles, and the Internet of Things (IoT).

In the first quarter of the calendar year, the revenue of Qualcomm's overall QCT chip sales business increased by 1% year-on-year to US$8.03 billion, which was inferior to the revenue of the fourth quarter of last year, which increased by 6.7% year-on-year to US$8.42 billion, but was higher than the midpoint of the guidance range and the market expectation of US$8 billion, and the pre-tax profit margin increased by 2 percentage points to 29%.

Among them, the revenue from mobile phone chips increased by 1% year-on-year to $6.18 billion, indicating that the smartphone market is recovering after two years of decline, although the recovery may not be satisfactory. In the fourth quarter of last year, the revenue surged 16% year-on-year to $6.69 billion.

Revenue from chip sales to automakers rose 35% year-on-year to $603 million, hitting a new high for three consecutive quarters and breaking the $600 million mark, and also showing an accelerated growth trend, after a rapid growth of 31% to $598 million in the fourth quarter of last year.

IoT revenue, which includes chips used in Meta's virtual reality headsets, fell 11% year-on-year to $1.24 billion, significantly smaller than the 32% year-on-year contraction to $1.138 billion in the fourth quarter of last year, which is typically made up of low-cost chips.

In addition, the lucrative licensing QTL revenue rose 2% year-over-year to $1.32 billion, beating expectations of $1.31 billion, reversing a 4% year-over-year decline to $1.460 billion in the fourth quarter of last year. This segment of the business has a pre-tax margin of up to 71%, mainly charged to companies that want to integrate Qualcomm's 5G or cellular technology into their products.

Qualcomm paid a dividend of $895 million in the first quarter of the calendar year, repurchased $731 million of shares, and raised its annualized dividend payment on common stock to $3.40 per share. Some analysts say that Qualcomm has raised its dividend for 21 consecutive years, proving its financial reliability and commitment to shareholder returns.

What do you focus on most?

In addition to the recovery of the smartphone market, Wall Street is also highly concerned about the business growth potential that generative AI brings to Qualcomm, as well as some of the operational challenges it faces in China, especially Apple, a major Qualcomm customer, losing market share or having a significant impact in the Chinese market.

On the one hand, the smartphone market may be recovering more slowly. At the beginning of the year, Qualcomm predicted that the global mobile phone industry in 2024 would be flat or grow slightly in 2023, and warned that some customers are still digesting excess chip inventories as the entire smartphone industry begins to enter a recovery cycle. According to IDC, smartphone shipments may have fallen by 3.2% last year, with a larger decline of 11.3% in 2022, and may instead increase by 2.8% to 1.2 billion smartphone sales in 2024.

JPMorgan Chase & Co. placed Qualcomm on a "negative catalyst watch list" as a result, saying that "we have not seen any significant changes in the fundamentals of the smartphone market and expect a tepid recovery in 2024."

At the same time, AI chips are becoming one of Qualcomm's main directions. Last year's quarterly report showed that generative AI has run through almost all chip business lines such as Qualcomm's mobile phones, automobiles, and PCs. The company's CEO Cristiano Amon has said that 2024 will be a key year for global AI smartphones, and generative AI is entering mobile phones very quickly.

In the fourth quarter of last year, Qualcomm launched the first mobile platform specifically built for generative AI, the third-generation Snapdragon 8 Gen 3 (Snapdragon 8 Gen 3), which can handle the computing needs of large language models, focusing on on-device AI in mobile technology, and Qualcomm hopes that the chip platform can provide power for the AI experience of Android flagship phones in fiscal 2024.

Market research firm Counterpoint Research expects Qualcomm to account for more than 80% of the generative AI smartphone market in the coming years, with "the high-end market driving Qualcomm's revenue growth, while the hybrid shift to the low-to-mid-end 5G market will further boost growth."

Qualcomm also launched the Snapdragon X Elite processor family for Windows laptops last October, and last week launched the Snapdragon X Plus chip based on the ARM architecture for artificial intelligence personal computers (AI PCs), which is expected to be available in mid-2024. Qualcomm wants to improve the performance and battery life of next-generation Windows PCs and set a new industry benchmark for generative AI experiences on PCs.

In terms of chip supply and patent licensing, Qualcomm has extended its agreements with Samsung and Apple for the next few years, excluding the risk that the world's top two smartphone manufacturers will abandon Qualcomm and use self-developed chips in certain fields, and will be deeply involved in Samsung's long-term product strategy of generative AI. As of the end of last year, Qualcomm also renewed long-term agreements with two major Chinese smartphone OEMs.

What do you think of Wall Street?

The bullish view is that AI has great potential for edge deployments, and Qualcomm is expected to take center stage in edge deployments, driving further revenue growth in the coming fiscal years. Based on this, Bernstein raised its price target to $200 from $170, suggesting an 18% upside.

Christopher Rolland, senior chip stock analyst at Susquehanna, who is bullish on Qualcomm's transition to AI, also raised his price target to $205, saying that "Qualcomm has a higher share of 5G-enabled phones launched this year" is encouraging. Cantor Fitzgerald's reason for raising its price target is the increase in the use of Qualcomm chips in Huawei and Xiaomi phones, as well as the cyclical recovery in other verticals.

The Motley Fool, a U.S. stock research and investment website, pointed out that the growth of AI-enabled smartphones and PCs will play a key role in Qualcomm's recovery:

Market research firm IDC predicts that AI smartphone shipments will reach 170 million units this year, more than three times the 51 million units last year. What's more, AI smartphones will account for 15% of the overall smartphone market this year, indicating that there is still a lot of room for growth in the future.

The AI smartphone market is expected to grow at an annual rate of 83% from 2024 to 2027, and Qualcomm is well-positioned in this segment as it provides chip processors to top smartphone OEMs (original equipment manufacturers) such as Apple and Samsung.

Qualcomm's Snapdragon processor powers the artificial intelligence capabilities of Samsung's latest Galaxy S24 flagship smartphone and is poised to push the envelope even further with a new chip for mid-range smartphones.

What's more, Qualcomm has also set its sights on the AI PC market, which may bring new opportunities for the company's future business growth, proving that Qualcomm can take full advantage of several fast-growing AI-related opportunities, and its price-to-earnings valuation is much cheaper than Nvidia's, making it a better entry point for AI investment. ”

HSBC raised its price target to $190 this week on the prospect of margin improvement, and is particularly optimistic about earnings per share for fiscal 2024 and 2025, mainly driven by an increase in the proportion of high-end smartphone system-on-chips (SoCs) in Qualcomm's portfolio. Qualcomm's long-term growth potential compared to its competitors stems from its revenue diversification strategy and expansion into non-smartphone segments.

Many analysts have pointed out that Qualcomm is at a critical stage of the transition from artificial intelligence to edge computing, which will be conducive to the demand for its technology. Wall Street is generally optimistic about Qualcomm's accelerated adoption of 5G and radio frequency (RF) market share, as well as its long-term adoption in the automotive and IoT sectors.

Under CEO Ammon's leadership, Qualcomm has been working to bring its chip technology to markets beyond smartphones, including PCs, automotive, the Internet of Things and virtual reality headsets. Diversifying revenue will not only help increase revenue potential, but will also allow Qualcomm to benefit from edge AI for PCs and smartphones, which is expected to drive significant changes for PCs and phones:

"Qualcomm is increasingly focused on seamlessly transforming from a wireless communications company in the mobile industry to an intelligent edge connected processor company with diversified revenue streams. It is witnessing the healthy development of edge networks, helping to transform connectivity in automobiles, commercial enterprises, homes, smart factories, next-generation PCs, wearables, and tablets.

Automotive telematics and connectivity platforms, digital cockpits powered by generative AI models, and C-V2X solutions are also driving emerging trends in the automotive industry, such as the growth of connected vehicles, the transformation of in-vehicle experiences, and vehicle electrification. Qualcomm believes that in the near future, it is expected to become the largest supplier of RF front-end for smartphones by revenue. ”

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