Buy, sell or hold Qualcomm shares?

Mobile chipset major Qualcomm (NASDAQ:QCOM) yesterday posted a better-than-expected fourth-quarter performance of FY24 and forecast better-than-expected numbers for the holiday quarter, sending the stock up about 6% in after-hours trading on Wednesday. While revenue rose 9% year-over-year to $33.19 billion, the company reported a significant increase in profit to $2.59 per share, compared to $1.23 per share in the year-ago period. The smartphone market has recovered somewhat this year after a post-Covid-19 lull, and Qualcomm in particular is benefiting from a wave of flagship smartphone launches from Chinese brands. At its current market price of just under $173, the share is trading around 10% below its fair value of $189 – according to Trefis estimates Qualcomm's review. In this analysis, we take a look at some of the potential opportunities and risks facing Qualcomm stock and help investors decide whether to buy, hold, or sell the stock. By the way, here's a positive scenario How Tesla shares can rise to $1,000 after Trump's re-election.

QCOM stock's rise over the past 4-year period has been anything but consistent, with annual returns significantly more volatile than those of the S&P 500. The stock's returns were 22% in 2021, -39% in 2022 and 35% in 2023. In contrast, the Trefis High Quality Portfolio is significantly less volatile with a collection of 30 stocks. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the stocks in the HQ Portfolio offered better returns with lower risk compared to the benchmark index. Less of a roller coaster ride, as the HQ portfolio performance metrics show. So what are some of the risks and upside factors that could drive Qualcomm stock going forward?

Let's start with the negatives first

Apple's in-house modem

A significant risk to Qualcomm's sales lies in Apple's development of its modem chips, which could ultimately replace Qualcomm's modems in future iPhones. Although Qualcomm has an agreement to supply Apple with chips until at least 2026, Apple's previous setbacks in communications chip development suggest that a transition will likely be gradual and gradual. Although Qualcomm does not break out revenue by customer, it is estimated that Apple accounts for over 20% of Qualcomm's total revenue – a significant portion of Qualcomm's revenue. The effect could have an even more significant impact on Qualcomm's margins, as Apple's devices typically require state-of-the-art technology and higher quality components. Additionally, Qualcomm's recent 10-K filing states that Apple has already started using modem chips from its competitors, possibly MediaTek or Samsung, in some of its devices. Although this risk has been known for some time, it continues to pose a detriment to Qualcomm's financials.

Large presence in China

Qualcomm is seeing stronger demand from China, driven by the increasing popularity of high-end Android-based devices. The licensing business is also gaining momentum in China, as Qualcomm has signed long-term licensing agreements with Chinese manufacturers Honor and Shenzhen Transsion Holdings. Companies headquartered in China accounted for a whopping 46% of Qualcomm's total revenue in the last fiscal year. However, this involvement in China carries significant risks. As Donald Trump is elected US President for a second term, the trade war between the US and China could well intensify. Trump has previously proposed tariffs of 10% to 20% on most Chinese imports and over 60% on certain goods. This could directly or indirectly impact companies like Qualcomm that rely heavily on Chinese revenue sources. Additionally, some of the demand Qualcomm is currently seeing from China could be temporary in nature, as Chinese OEMs may be stockpiling chips in anticipation of future trade tensions under a Trump administration.

ARM Litigation

Qualcomm is also facing litigation due to an ongoing dispute with British chip designer Arm, which supplies the core architecture for most of Qualcomm's high-end chips. Arm has accused Qualcomm of illegally using parts of its intellectual property and threatened to revoke access to its architectural designs. To be sure, both companies have strong incentives to establish themselves. Qualcomm relies on Arm's designs to run its chip business, while Arm relies on Qualcomm because it is one of the largest mobile chipset suppliers in the world. The dispute remains a potential headwind for Qualcomm as the trial is set to begin in December.

Opportunities

Premiumization of the smartphone market

Although the smartphone market slowed down in 2023 following the Covid-19 pandemic and also due to some economic uncertainties, things have improved. Research firm IDC estimates that global smartphone shipments could grow nearly 6% to 1.23 billion units in 2024. This should benefit Qualcomm's CDMA Technologies segment, which sells application processors, modems and software for mobile devices and other electronics. Additionally, there is a clear trend toward more premium smartphones, especially in developing markets. This, in turn, is driving demand for high-end chips, which should help boost Qualcomm's margins. The company reported an operating margin of 28% for its chip division last quarter, up 200 basis points from a year ago, and expects margins could rise to 29% to 31% in the first quarter of fiscal 2025.

Automotive Opportunities

Qualcomm's automotive business is also seeing significant growth as semiconductors play a larger role in vehicles, driven by trends such as electrification and autonomous driving. In the most recent quarter, auto sales rose 86% to $899 million. Qualcomm has a strong development pipeline with automakers and expects automotive sales to grow 50% year-over-year in the current quarter. There is plenty of room for growth as electronics make up a larger portion of vehicle input costs. For example, consulting firm Deloitte estimates that electronics now account for 40% of the total cost of a new car, compared to 20% in 2000, and this trend is likely to increase in the future. Qualcomm should be well positioned to benefit. The company is on track to exceed $4 billion in automotive sales next year. Many leading automakers are adopting the Snapdragon Elite automotive platform for their future software-driven vehicles, including Mercedes-Benz and China's Li Auto.

PC and AI

The growing interest in generative artificial intelligence represents an opportunity for Qualcomm. While the company is seeing higher demand for chipsets optimized for AI applications for smartphones, including improved voice assistants and image generation, the AI ​​trend is also allowing Qualcomm to expand in the PC market, where vendors want to integrate AI features directly into laptops and desktops. For example, in May, Microsoft and other Windows PC makers announced new AI-enabled computers that use Qualcomm's Snapdragon X Elite and Snapdragon X Plus processors. The X Elite has an integrated NPU (Neural Processing Unit) specifically designed to run machine learning algorithms. The company says it has about 58 platforms launched or in development with these new chips. As the lines between mobile devices and PCs continue to blur and customers value battery performance and portability, Qualcomm could benefit. Business is picking up speed. Qualcomm's Internet of Things segment, which includes its new PC chips, reported revenue of $1.68 billion in its most recent quarter, up 22% from a year ago.

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