While it has diversified into automotive and data center sectors, its smartphone business continues to weigh on the company's share price.
The potential for Qualcomm (QCOM) to become a dominant force in the data center chip market remains highly uncertain. However, unlike many other speculative AI chip stocks, investors have not placed unrealistic, high-stakes bets on its success.
A glance at the stock's recent performance might suggest a different story. Since the company announced securing a major data center customer on its late April earnings call, its shares have surged over 40%, outperforming the vast majority of chip stocks during that period.
This market enthusiasm, however, is built upon a foundation of long-term underperformance. Even with this recent rally, Qualcomm's total return over the past two years is a meager 5%, while the Philadelphia Semiconductor Index has soared more than 150% in the same timeframe.
Qualcomm remains one of the most undervalued major chipmakers, trading at just over 20 times its expected earnings for the next four quarters. In stark contrast, Arm, which has also recently entered the data center chip race, trades at a forward price-to-earnings ratio of approximately 175.
Reasons for the Valuation Gap
This significant valuation gap stems from persistent market concerns over Qualcomm's heavy reliance on Apple as a customer. Wall Street has largely pigeonholed the company as a mobile chip supplier, overlooking the value of its other business segments.
The San Diego-based company is a leader in setting the communication standards that connect mobile devices to networks. Its latest quarterly report shows that 57% of its revenue still comes from handset sales.
The outlook for the smartphone industry is currently challenging. IDC predicts global smartphone shipments will decline by 14% this year, impacted by AI computing demands diverting memory chip capacity and shortages of other handset components.
Even before the memory chip shortage, smartphone market growth had stalled, with annual sales increases limited to single digits. The market is saturated, and on-device AI features have not provided a significant boost to sales.
The impending loss of Apple as a major customer also continues to pressure Qualcomm's stock. For years, Qualcomm has supplied modem chips for iPhones, a business analysts estimate was worth over $5 billion annually, accounting for roughly 11% of revenue last fiscal year. Apple is now phasing out Qualcomm modems in favor of its own designs. Qualcomm expects hardware revenue from Apple to fall to zero following the launch of new iPhone models this autumn.
Strategic Diversification Efforts
In recent years, Qualcomm has proactively pursued a diversification strategy to reduce its dependence on the handset market. Since Cristiano Amon became CEO in 2021, the company has expanded into several new growth areas, which are now beginning to contribute to stable, high-growth revenue streams.
A primary focus of Amon's strategy is the automotive chip sector, capitalizing on demand for hardware related to vehicle connectivity and autonomous driving.
In 2022, Qualcomm acquired Swedish auto parts maker Veoneer, divesting non-autonomous driving assets to focus on automotive cockpit and driver-assistance technology. In the latest quarter, its automotive revenue reached $1.3 billion, up sharply from $240 million five years ago.
While S&P Global forecasts flat global new car sales this year, Qualcomm's automotive business is expected to continue growing due to increasing chip content per vehicle and market share gains. Analysts project the segment's revenue will grow approximately 45% year-over-year in the fiscal quarter ending in June.
Amon has also led Qualcomm's expansion into other areas. Its Internet of Things chip business generated $1.7 billion in revenue last quarter, a 9% increase. Leveraging technology from its 2021 acquisition of startup NUVIA, personal computers powered by the company's latest processors have been launched in recent years.
Venturing into AI Data Center Chips
Amon's latest strategic bet is on AI chips for data centers. Qualcomm is a late entrant to this field, where NVIDIA holds a dominant, seemingly unassailable position.
However, if the AI industry boom persists, Qualcomm still has an opportunity to carve out a niche. The explosive growth of autonomous AI agents has significantly increased demand for high-performance central processing units, a market Qualcomm's products can address. The company is already producing AI inference chips designed to accelerate the deployment of various AI models.
Using technology gained from last year's acquisition of Alphawave, Qualcomm has secured an agreement to supply custom AI chips to a major technology company. Amon revealed in April that shipments of these custom chips would begin later this year, with more details to be shared at an upcoming investor briefing.
At a time when the AI frenzy has inflated the valuations of most chip companies, Qualcomm stands out as a rare value investment in the semiconductor sector, supported by its diversified business portfolio.
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