Semiconductor chips are one of the most popular industries in the US stock market in 2023, mainly due to the rise of generative AI, which is driving the demand for precision chips.

However, Qualcomm (QCOM), which makes chips, is not riding the wave of AI. While the mobile chip giant has also seen double-digit gains in its share price this year, it has outperformed other companies with closer ties to artificial intelligence.

The reason behind this could be that the mobile business fell into a cold winter, causing Qualcomm's 2023 financial results to drop sharply. But from the latest performance guidance, Qualcomm is expected to return to growth in a new fiscal year, will this be a turning point for Qualcomm's performance?

This phase of opportunity will take you to a deeper understanding of Qualcomm, analyze its business model, explore why its performance fell so much in 2023, and whether there is any chance of a reversal in the future.

What does Qualcomm make money on?

Qualcomm was founded in 1985 with the wireless communications business. After more than 30 years of technology accumulation, it is now one of the leaders of 5G chips for mobile phones worldwide.

Qualcomm's main business is currently divided into two main segments, namely QCT (chip business) and QTL (technology licensing business):

1. QCT Business: Mainly responsible for the development and sale of chips and their one-stop solutions based on communication technologies such as 3G/4G/5G. Depending on the terminal application of the chip, this part of the business can also be divided into mobile phones, cars and IoT;

2. QTL Business: Qualcomm licenses its vast amount of patented technology to vendors and charges a percentage of “patent licensing fees,” aka high excise duty, from equipment shipped by the vendor.

According to Qualcomm's latest report, total revenue for fiscal 2023 was $358 billion, with QCT contributing 85% of total revenue, and QCT's mobile chip business contributing 63% of total revenue

It can be seen that the mobile phone business accounts for half of Qualcomm's revenue. Although Qualcomm has also tried to diversify its products in recent years, it is still difficult to change the relatively large share of the mobile phone business in the short term.

As a result, Qualcomm's good performance is related to the outlook for the entire smartphone market, so some investors also see Qualcomm as a “mobile stock”.

BASE PLATE: MOBILE CHIP

Qualcomm's most core business is mobile chips, which are the mainstay of its revenue.

Among the mobile chips sold by Qualcomm, mainly SoC chips are based on. SoC is actually a chipset that brings together multiple types of chips including CPU, GPU, storage chip, baseband chip, etc.

Qualcomm's flagship product is a series of chips codenamed Snapdragon Snapdragon. This series of star products received the attention of many mobile phone manufacturers once it was launched and is currently used by many Android phone manufacturers, such as Samsung, Xiaomi, Motorola, etc.

Data from Counterpoint shows that Qualcomm is currently the world's second-ranked supplier of mobile chips, with a market share of 29%, behind only Media Tek's 30%.

However, Qualcomm's mobile phone business has been lackluster in the past year, with the latest results showing that Qualcomm's fourth-quarter mobile revenue in fiscal 2023 fell 27% year-on-year.

The company's overall performance has also been dragged down by the share of the mobile phone business. Four-quarter total revenue and adjusted EPS declined 24% and 35%, respectively. Accounting for the previous three quarters, Qualcomm's revenue and earnings per share have declined year-on-year for four consecutive quarters, and the results are pretty much in the doldrums.

There may be two reasons behind this: one is the lack of appetite in the entire smartphone market, and two is the decline in the market share of Qualcomm mobile chips.

Global Smartphone Market

For the past two years, global smartphones have been in a very low state of popularity due to component shortages, increased inventory, and the end of the 5G replacement cycle.

The smartphone industry is a more mature industry with strong cyclicality. WHEN A NEW TECHNOLOGY EMERGES (SUCH AS 5G), THE DEMAND FOR UPGRADING PHONES INCREASES, WHICH DRIVES BUSINESS GROWTH FOR DEVICE MANUFACTURERS; BUT WHEN THE UPGRADE CYCLE ENDS, THE DEMAND FOR USERS TO REPLACE THEIR PHONES DECREASES, LEADING THE INDUSTRY TO ENTER THE NEXT CYCLE.

But the good news is that the smartphone market has shown some signs of a rebound recently, with smartphone sales growing by 5% year-on-year in October 2023, the first positive growth after 27 consecutive months of year-on-year sales declines. But whether this warming signals the end of the smartphone downcycle remains to be seen further.

Market Competitive Situation

In addition, Qualcomm's competitive position in the mobile chip market is also one of the factors affecting its performance. Currently, the mobile chip market is fiercely competitive, with Qualcomm facing competition from MediaTech and other vendors.

Qualcomm's market share in Q2 2023 is 29%, although higher than the previous two quarters, but still below 32% for the same period in 2022, according to Counterpoint data.

In the future, if Qualcomm is able to regain market share of some high-end mobile chips from the hands of MediaTek, it could have a boost to its performance.

Therefore, to know if future high performance will really warm up, there is also a need to keep an eye on these two key indicators, whether the global smartphone market will warm up and whether Qualcomm can maintain or expand its market share.

GROWTH POINT: AUTOMOTIVE BUSINESS

In recent years, Qualcomm has wanted to get rid of its heavy reliance on its mobile business, and the automotive business is expected to become Qualcomm's new growth engine.

Qualcomm said at its investment day that over the next decade, the automotive market will account for $1 billion in market size around chips and software, mainly distributed among three areas: $160 billion related to IoT chips, $250 billion for smart cabins and $590 billion for smart driving.

Faced with such a huge market, Qualcomm will naturally not pass up this transformation.

Qualcomm currently has a variety of chips and products for the automotive business, such as Snapdragon Ride, Snapdragon Auto Connectivity, Snapdragon Cockpit, and more.

Ranked by shipment volume, Qualcomm is currently the world's number one automotive chip supplier, accounting for 80% of the entire market, data from Counterpoint shows.

While Qualcomm's automotive chips currently hold the upper hand, the automotive business does not contribute much to Qualcomm's revenue.

In fiscal 2023, automotive revenue grew 24% year-on-year to US$19 billion, making it the only business in the QCT business to maintain growth. However, it is not large in size, accounting for only 5% of total income.

From this it can be seen that although the automotive business has a good development outlook, the impact on performance for the time being is limited, and it is worth continuing attention to the future.

summed

Finally, summarize.

Qualcomm's main source of revenue is its mobile phone business, which accounts for more than 60% of total revenue.

Qualcomm's performance has been relatively weak over the past year, mainly due to the low popularity of the smartphone market.

The recent signs of a rebound in the global smartphone market are showing, and whether this warming will continue may be one of the factors affecting Qualcomm's future performance.

Although the automotive business is considered to be Qualcomm's future growth engine, the impact on Qualcomm's performance is relatively limited at the moment, so it is worth continuing to keep a close eye on.