In the field of mobile chips, there is a massively influential company, which is Qualcomm. Most of the high-end Android phones we have may have a Qualcomm Snapdragon series chip inside, while even though Apple phones use their own A-series chips, they still need to pay licensing fees to Qualcomm for their baseband signal chips.

With its unique position in the mobile chip market and deployment in the AI PC chip domain, Qualcomm's stock price has surged over 50% since the beginning of this year, performing exceptionally well among chip stocks.

Can Qualcomm continue its impressive performance? We can explore some answers from its earnings reports. Each earnings release from the company may also represent a good trading or investment opportunity. However, investors need to understand how to interpret its earnings before that.

For Qualcomm's earnings, we can focus on four key aspects: the core business, growth points, inventory situation, and profitability.

1. Base

The core business of a company is generally its largest revenue contributor. Looking at the revenue composition, Qualcomm's revenue mainly includes chip-related business (QCT) and technology licensing business (QTL), with QCT business revenue accounting for approximately 85%, and QTL business revenue accounting for about 15%.

In the QCT business, the mobile chip business dominates absolutely and accounts for about two-thirds of total revenue. In the QTL business, Qualcomm's technology licensing income largely comes from phone manufacturers like Apple and is closely related to the mobile chip business.

Therefore, the core business of Qualcomm is undoubtedly the mobile chip business. Looking at the revenue situation of the past few quarters, Qualcomm's mobile chip business has returned to growth in the last two quarters after experiencing continuous declines.

So, how is the growth prospects of Qualcomm's mobile chip business? Is the foundation stable? It mainly depends on two points.

The first point is the overall growth of the mobile industry. If the overall sales of phones are good, it will naturally drive the demand for Qualcomm's mobile chips. Conversely, if phone sales are weak, Qualcomm's chip sales pressure will also increase significantly.

According to IDC data, after experiencing a nearly two-year downturn in global phone shipments, the volume began to stabilize and rise in the past four quarters, which is also an important reason for the recovery of Qualcomm's mobile chip business.

Next, we need to observe the replacement demand brought by AI development, and whether it can further boost the recovery of the mobile industry. This is also the key to whether Qualcomm's mobile chip business can continue to rebound.

The second point is the changes in global market share of mobile chips. Currently, the top three in the field in terms of shipments are MediaTek, Qualcomm, and Apple. Apple's chips are mainly for internal use, so we can mainly compare MediaTek and Qualcomm. Due to seasonal variations in phone sales, we compare each quarter.

Taking the first quarter of the past five years as an example, according to Countpoint data, Qualcomm's market share of mobile chips has overall declined slightly, and is consistently being surpassed by MediaTek.

Although Qualcomm ships more towards the high-end segment with higher chip prices, and its market share by sales revenue is higher than MediaTek, MediaTek is also focusing on the high-end product sector. Its latest Dimensity 9300 chip is used in multiple high-end Android flagship devices, further shaking Qualcomm's leading position in the high-end chip market.

Therefore, with Qualcomm's market share being eroded by MediaTek, its customer base is bound to be shaken. Going forward, we can observe whether Qualcomm's market share can stabilize and bounce back, stabilizing its business foundation.

2. Growth points Among Qualcomm's existing businesses, the only product that has continuously grown is the automobile chip product.

In Qualcomm's existing business, the only area showing a continuous growth trend is the automotive business related chip products.

Qualcomm's main focus is in the intelligent cockpit chip field, where it takes a dominant position. With the rapid growth of the new energy automobile industry, Qualcomm's automotive chip revenue is also on the rise.

In recent quarters, Qualcomm's automotive chip revenue has been accelerating continuously. In the Q3 of the fiscal year 2024, its revenue was $0.81 billion, a year-on-year increase of 86.9%. However, in terms of revenue scale, Qualcomm's automotive chip revenue accounts for less than 10% of total revenue. Therefore, despite the current strong growth rate, its contribution to overall revenue growth is still relatively limited. In the future performance, we can continue to observe whether Qualcomm's automotive chip revenue can maintain strong growth, thereby expanding its revenue share and enhancing the drive for total revenue growth.

In addition to the automotive chip business, Qualcomm's layout in the personal computer (PC) chip field may also become a new growth point. Previously, the PC chip market was dominated by Intel and AMD, but with the development of AI technology, Qualcomm has the potential to become a disruptor.

In May 2024, Microsoft released the latest generation of the Surface tablet, using Qualcomm's Snapdragon X Elite chip. PC giants like Lenovo, Dell, HP, will also launch AI PCs equipped with Qualcomm chips.

How much additional revenue will AI PCs bring to Qualcomm? In the Q2 of the fiscal year 2024 conference call, the management said that the PC business would only contribute revenue in 2025, but did not provide specific revenue guidance. According to Bank of America analysts' forecasts, Qualcomm will occupy 70% of the AI PC chip market share, contributing $0.286-0.861 billion in revenue to Qualcomm in 2025, with relatively low revenue contribution in the early stages of development.

Qualcomm's stock price showed a significant acceleration in May 2024, largely driven by the introduction of AI PC chips. In future performance, we can continue to focus on Qualcomm's management guidance on the AI PC chip business and the revenue performance after 2025.

3. Inventory change

Qualcomm's revenue mainly comes from mobile chips. For this cyclical industry, inventory levels are also a very important indicator to measure cyclical changes and growth expectations. When industry demand decreases and oversupply occurs, the company's inventory levels will rise, sales pressure will increase, and this will put pressure on the stock price. Conversely, when the cycle reverses and demand improves, the company's inventory levels will quickly decrease, and sales prospects will improve.

A more appropriate measure of inventory levels is inventory/revenue, with a larger ratio indicating higher inventory levels and greater sales pressure. Qualcomm's inventory/revenue ratio was quite healthy during the 2020-2021 period, mostly staying within 35%. During this period, Qualcomm's stock price also showed an upward trend.

However, starting from 2022, with the onset of a downward cycle in the mobile industry, Qualcomm's inventory/revenue ratio has been on the rise, reaching close to 80% in the Q3 2023 earnings season. Qualcomm's stock price trend during this period was also lackluster.

In recent quarters, Qualcomm's inventory/revenue ratio has started to improve continuously, and the stock price has also reversed and reached new highs. However, compared to the previous levels of 30%-40%, Qualcomm's inventory/revenue ratio is still relatively high, and we need to continue observing whether it will continue to improve in future performance.

4. Profitability

The improvement in Qualcomm's profitability during the bottoming out and rebound of the mobile industry cycle is also one of the market's key focus points.

From the perspective of gross margin, with the global mobile phone sales returning to growth, Qualcomm's overall gross margin level has also rebounded, slowly rising from around 55% to about 56%, but the improvement is not yet significant, still some distance away from the previous high point of about 60%.

From the perspective of net profit margin, Qualcomm has risen from a net profit margin of about 17% to about 23%, with some room for improvement from the previous peak of over 30%.

In future earnings reports, we can continue to observe whether Qualcomm's gross margin and net profit margin levels can further improve.

Upon seeing this, you may have some new insights on how to interpret Qualcomm's performance. It is worth noting that each time a prominent company releases its earnings, it may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

Finally, to summarize,

For Qualcomm's performance, we can focus on four key points: fundamentals, growth drivers, inventory changes, and profitability.

First, Qualcomm's core business is mobile chip business, and its revenue is mainly affected by the shipping cycle of the mobile industry; whether Qualcomm's core business is stable largely depends on whether the company can reverse the trend of market share decline.

Second, Qualcomm's current continuous growth point is mainly the automotive chip business, and the potential future growth point is the AI PC chip business. We can pay attention to whether the revenue scale of these two businesses can continue to increase, thus accelerating Qualcomm's revenue growth.

Third, Qualcomm's inventory/revenue indicators are closely related to stock price trends, and currently this indicator is gradually improving. We can observe the continuous decline of the indicator.

Fourth, Qualcomm's profitability is in the process of bottoming out and rebounding. We can observe the improvement in its gross margin and net profit margin.

Every time a company releases its business performance, it may bring potential trading opportunities. Investors can consider suitable trading varieties based on their personal risk tolerance.