When it comes to Qualcomm (Nasdaq: QCOM), many people’s first reaction is “mobile phone chip overlord”. However, in recent years, Qualcomm has actively laid out and transformed into personal computers, Internet of Things, and automobile fields. It is transforming from a company to Communication companies transform into connected computer companies. With the resurgence of the artificial intelligence wave, consumer electronics, mainly smartphones and personal computers, are showing signs of recovery, and Qualcomm is also expected to return to the fast lane.
Transform from a communications company to an Internet computing company
If you want to choose to label Qualcomm, terms such as “mobile phone chip giant”, “monopoly” and “patent tax” should be ranked high; these descriptions are all correct, but they are not comprehensive. Because Qualcomm’s fundamentals have undergone major changes, its diversified development strategy in automobiles, Internet of Things, personal computers and other fields has made its path to growth again clearer. Qualcomm’s current performance in the industry can be described as full of vitality.
All these changes will begin after CEO An Meng takes office in June 2021. Anmeng believes that Qualcomm faces huge market opportunities in the context of global industrial digitization. The strategy he formulated for the company is diversification. He hopes that communications, automobiles, and the Internet of Things business can stand on three pillars, so that Qualcomm can transform from a communications company into a data processing company for intelligent edge networks. With the resurgence of the artificial intelligence wave, Qualcomm has taken advantage of the trend to advance into the personal computer market. At this time, Qualcomm’s goal has become “becoming an Internet computing company.”
The dawn of recovery in mobile phone communications business appears
Despite Qualcomm’s diversification transformation, mobile communications remain its most important business unit. According to Qualcomm’s financial report data for fiscal year 2023, the mobile communications business still accounts for 63% of the company’s total revenue, and its status is unshakable. Consumer electronics itself has strong cyclical characteristics. In recent years, global mobile phone shipments have declined for several consecutive years. But the good news is that the latest statistics show that global mobile phone shipments have narrowed their year-on-year declines for four consecutive quarters, and a trend turning point (from falling to rising) seems to be around the corner. This is definitely good news for Qualcomm, the mobile phone chip overlord.
In order to prepare for the upcoming industry recovery, Qualcomm has made full preparations in product research and development. Its newly released Snapdragon 8Gen 3 processor is Qualcomm’s first mobile platform carefully designed for artificial intelligence. It can run generative AI models on the device and is expected to become a standard feature of high-end Android phones. In the Chinese market, Xiaomi 14, the first mobile phone equipped with this processor, is selling like hotcakes; in overseas markets, Samsung, the king of Android phone sales, has determined that its flagship Galaxy S24 will still be based on the Snapdragon 8Gen 3 processor. In addition, what makes investors even more happy is that Apple, which has been rumored to use self-developed products, has officially announced that it will still use Qualcomm’s Modem RF system from 2024 to 2026.
In the mid-range market, Qualcomm has also gone all out and launched the Snapdragon 7 Gen 3, which also uses artificial intelligence as its selling point to comply with the upcoming AI mobile phone trend. It is reported that Honor and Vivo will be the first to launch the Snapdragon 7 Gen 3 , a mobile phone manufacturer of processors. At the beginning of the year, with the popularity of ChatGPT, generative AI revived the artificial intelligence wave. This wave first broke out in the cloud, and the huge demand for computing power made GPU hardware like Nvidia in short supply. As the AI wave continues to develop, people’s attention has gradually shifted from the cloud side to edge devices (including personal computers, smartphones, etc.). Because of security, privacy and other reasons, many people do not want their data to be sent to the cloud, and the concept of AI mobile phones came into being.
In the industry chain, Qualcomm is undoubtedly an active promoter of the AI mobile phone concept. Due to the addition of artificial intelligence functions, the functions and performance of Qualcomm chips continue to be upgraded, which will undoubtedly push up the unit price of its products. If this is coupled with the normal demand for mobile phone upgrades, it will form a wonderful balance between volume and price for Qualcomm. Li scene.
The hot and cold aspects of IoT business are intertwined
Qualcomm originally focused on mobile phone connection business, and its first choice for diversification is the Internet of Everything, which is a natural move. The Internet of Things business now accounts for more than 16% of its revenue. The Internet of Things itself covers a wide range. For Qualcomm, it can be divided into at least three major directions: consumer Internet of Things, industrial Internet of Things, and edge networks. In the field of consumer Internet of Things, it includes many Qualcomm products, such as wearable products, consumer electronics, etc., but the most eye-catching one should be XR products, which is also the only way for the development of the consumer metaverse. In the field of XR, Qualcomm believes that its Snapdragon platform is the platform of choice for all leading VR, MR and AR manufacturers.
In edge networks, Qualcomm continues to be the global Wi-Fi leader in enterprise and home networks and broadband gateways. Qualcomm’s Wi-Fi 7 solutions have won more than 350 design wins to date and have received widespread attention. For the Industrial Internet of Things, Qualcomm is empowering the digital transformation of many industries, from automation and logistics to smarter cities, medical, retail and metering industries. Qualcomm has extremely considerable long-term development opportunities in these areas.
But in the short term, the IoT business is a mixed bag of good and bad news. The good thing is that in the field of consumer Internet of Things, new products are constantly being launched. For example, the recently popular new artificial intelligence hardware AI PIN uses Qualcomm’s Snapdragon platform, and Meta’s Quest 3 VR headset is powered by Qualcomm’s latest XR platform Snapdragon. Dragon XR2 Gen2 driver, while Ray-Ban’s smart AR glasses are equipped with Qualcomm’s Snapdragon AR1 Gen1 platform; the downside is that it is consistent with industry trends, especially in the industrial Internet, there is still weak demand and channel inventory Higher questions. Looking forward, Qualcomm believes that its IoT business will bottom out in the next two quarters and then enter an upward channel in the second half of 2024.
Automotive business continues to accelerate
The automotive business currently accounts for just over 5% of the company’s revenue, which is not a large share. But the business is gaining momentum. Automotive revenue increased 23% quarter-on-quarter to $535 million in the quarter, marking the 12th consecutive quarter of double-digit year-over-year growth.
In the automotive world, digital transformation continues to bring new levels of computing, intelligence and cloud connectivity to vehicles. These trends are driving new user experiences, driver assistance, autonomy and safety advances. They also offer the potential for new revenue opportunities as vehicles gain the ability to evolve through over-the-air updates to digital services. “Software-defined cars” are becoming increasingly popular. Qualcomm currently builds the Snapdragon automotive digital platform, which includes the Snapdragon automotive digital cockpit platform, Snapdragon Ride autonomous driving platform, Snapdragon Car-to-Cloud service platform and Snapdragon Auto Connectivity network connection platform. In the future, these major hardware platforms and software will have more than 10 times growth opportunities. Qualcomm currently leads the way in three major areas: telematics, vehicle connectivity, and next-generation smart cockpits. Qualcomm previously acquired Veoneer’s Arriver software platform, which made Qualcomm’s autonomous driving business even more powerful. According to Anmon, Qualcomm is in an excellent advantageous position in the ADAS field. Globally, more than 25 car companies have chosen to use the Snapdragon automotive digital cockpit platform.
In fiscal year 2023, Qualcomm’s automotive business revenue was US$1.9 billion, a year-on-year increase of 35%. Qualcomm expects that its automotive business will still grow rapidly, with its mid-term goal of revenue reaching US$4 billion in fiscal 2026. Its confidence comes from the fact that it already has design win contracts worth more than US$30 billion.
Personal computer business opportunities and challenges coexist
Qualcomm has previously entered the personal computer field and launched ARM-based CPUs, but it did not pose a threat to the kings in the field such as Intel and AMD. As the wave of artificial intelligence breaks out again and the concept of AI PC rises, Qualcomm adds fuel to the fire and launches the Snapdragon X Elite processor, once again launching an impact in the field of personal computers. Judging from the reviews received after the release of Snapdragon X Elite, its performance has received market praise.
I’m cautiously optimistic about this. I think Qualcomm has indeed taken a meaningful first step in the field of personal computers, but to achieve real success in this highly competitive market, many factors will need to work together. The first is the overall recovery of the industry: the personal computer and smartphone industries are similar in that they are highly cyclical. The good news now is that global sales of personal computers have basically bottomed out and are expected to rise in the future. Secondly, it requires the cooperation of other participants in the industry chain: as a new entrant in the industry, it is not possible to come up with a cost-effective processor to solve everything. For example, it needs the full cooperation of Microsoft to provide it with a 64bit version of Windows 11 suitable for the ARM platform; another example is its final sales volume, which actually depends on whether brand manufacturers such as Lenovo, HP, and Dell are willing to adopt Qualcomm’s new products on a large scale. It launches personal computers with various configurations and specifications.
Possible investment opportunities
As the smartphone industry was in a downward cycle, Qualcomm’s performance and stock valuation were inevitably affected. In order to combat this cyclicality, Qualcomm has adopted a diversified strategy. In addition to deeply cultivating the original mobile phone communications field, it has also moved into the Internet of Things, automobiles, personal computers and other fields, and has achieved initial results. It is worth mentioning that although it adopts a diversified strategy in terms of business, it adopts a unified technology platform (one technology) strategy in terms of research and development, expanding the Snapdragon Snapdragon platform, which was originally focused on mobile phone chips, to automotive, Internet of Things, and Personal computers and other fields. In this way, we can rely on the original technical advantages, and secondly, a very important point is that we can save huge research and development costs. The latter is often overlooked, because people are usually more attracted by the bright prospects of cool technologies, but it is difficult to notice that these bright prospects require continuous and huge investment in R&D to achieve commercial success.
Factors that are currently favorable to Qualcomm: First, the smartphone industry is beginning to recover. As a leading company in the industry, Qualcomm is expected to seize the opportunity and enter a good situation where product unit prices and sales volume are both rising. The second is the rise of edge artificial intelligence. Edge coverage includes personal computers, smartphones, and the future Internet of Things and smart cars. It can be seen that these fit perfectly with Qualcomm’s business areas. The third is that Qualcomm’s current valuation is relatively reasonable and not overvalued. Its TTM price-to-earnings ratio for fiscal year 2024 is currently only about 20 times.