Qualcomm Stock: Stepping Over The Wall With AI (NASDAQ:QCOM)

As with a lot of technology companies, Qualcomm (NASDAQ:QCOM) ran into a wall last year as elevated Covid spending on electronics led to a dip in demand for key markets. Ultimately, though, the wireless chip giant will step over the wall with new ventures into AI, AR/VR and automotive chips to expand from the mature handset market. My investment thesis remains ultra Bullish on the stock trading at multi-year lows at $115.

Future AI Opportunity

While Nvidia (NVDA) is currently getting all of the attention for AI chips with sales surging in the billions, Qualcomm has a big opportunity in on-device generative AI chips. The theory is that the AI computing power will shift to edge devices for more personalized security and assistance.

On the FQ3’23 earnings call, Qualcomm CEO Cristiano Amon discussed the AI computing needs:

Our AI technology is highly differentiated with best-in-class high-performance, low-power heterogeneous computing across our CPU, GPU and NPU. And as multibillion parameter Gen AI models run pervasively and continuously on device, we believe our NPUs unparalleled AI processing performance and power efficiency will become a requirement.

The impressive part is that Qualcomm is already working with Meta Platforms (META) to implement Llama-2 based AI on flagship smartphones and PCs. As well, the wireless chip giant is working with Microsoft (MSFT) on Windows based Snapdragon powered laptops with capabilities to accelerate their AI apps.

AMD predicts the AI chip opportunity will reach $150 billion by 2027. A big part of this opportunity could include NPUs in smartphones and the likes. The global smartphone market is over 1.5 billion units annually and it doesn’t take large chip costs to quickly see the Qualcomm opportunity surge into the multi-billion range with the premium tier smartphones initially including new AI chips.

As with the Meta Platforms collaboration, the AI chips won’t enter the smartphones and potentially IoT devices until 2024. A lot of the key smartphone models, such as the iPhone 15, are already set to be launched in the next few months.

The AI opportunity in headsets only builds on the growing potential in Automotive in IoT markets. The Automotive market continues to provide double-digit growth despite the tough economy for chips, in general.

Qualcomm forecasts the handset market hits bottom here with growth going into the holiday season. Sales are down high-single digits this year suggesting the guidance for a $8+ EPS in FY23 is the trough earnings for this cycle.

Consensus analyst estimates have numbers rebounding going forward. The average estimates aren’t overly aggressive with Qualcomm not even rebounding to a $10 EPS by FY25.

The significant opportunity for Qualcomm is that edge AI computing kicks in the next smartphone cycle. Even with 5G and Covid, smartphone demand only returned to 1.51 billion units, below the peak at 1.53 billion back in 2018 and 2019. The market has hit the projected rebound to record levels the last couple of years due to weak demand out of China.

Even without a rebound in units sold, Qualcomm has the ability to gain content similar to how 5G led to a nearly doubling of content in those phones and a prime reason why sales surged. FY22 revenues topped $40 billion, yet the surge wasn’t due to a ramp in smartphone units, but rather higher content per phone and automotive growth.

Our view remains that the peak FY22 EPS of $12.53 is a more normal profit opportunity due to limited boosts from Covid inflating the numbers. The edge AI chips provide the next leg up whether FY24 or FY25 along with AR/VR chips for Meta Quest 3 and beyond.

Qualcomm plans to share more information on the Gen AI capable products at the Snapdragon Summit in October. The company should be able to outline a future that is far more appealing than a stock trading below 12x forward earnings, with the potential for both explosive AI growth and higher normalized profits.

Qualcomm will probably lose Apple as a modem customer for 5G, but don’t be surprised when new AI capabilities brings the company back for the chips from the wireless leader. All the while, the massive backlog in automotive is targeted at pushing those annual revenues to $4 billion in revenues by FY26 due a massive $30 billion backlog.

Takeaway

The key investor takeaway is that Qualcomm hit a wall the last year, but the wireless chip company should quickly step over that wall due to AI. The stock is far too cheap at only 12x forward EPS targets that appear very conservative.

Investors should continue using the current weakness in the stock to load up on the leading wireless chip company moving into AI, Automotive and IoT.