Qualcomm shares up 40% this year on rapid growth in AI and automotive businesses

Major mobile chipsets Qualcomm Inc. (NASDAQ: QCOM) The company's shares are up 41% year to date. Factors driving the company's recent gains include signs of a recovery in the smartphone market and optimism that the generative AI trend will boost smartphone sales. Qualcomm last month reported better-than-expected second-quarter fiscal 2024 results and also provided a better-than-expected third-quarter outlook. The company now expects third-quarter revenue of $8.8 billion to $9.6 billion, an increase of more than 13% at the high end of its outlook, and earnings per share of $2.15 to $2.35.

The smartphone market took a lull in 2023 but has recently picked up as the COVID-19 pandemic eases and economic uncertainty weighs on consumer spending. Global smartphone shipments are expected to grow 11% year-over-year in the first quarter of 2024, according to Canalys. This is a boon for Qualcomm's CDMA technology division, which supplies application processors, modems and software for mobile devices, network equipment and consumer electronics.

The growing interest in generative artificial intelligence is also benefiting Qualcomm. The company has seen growing demand for its high-end chipsets, such as the Snapdragon 8 Gen 3, which are optimized for AI, including enhanced voice assistants and image generation. Additionally, Qualcomm is also seeing growing demand from China, where local OEMs are increasing adoption by more than 40% compared to last year, as demand for premium Android devices grows at the expense of Apple's iPhones. Qualcomm's chips also seem to be gaining traction in the PC market, as vendors look to bring AI natively to computers. In May, Microsoft and other Windows PC players unveiled new computers with artificial intelligence capabilities using chips such as Qualcomm's Snapdragon X Elite and Snapdragon X Plus processors. The X Elite processors have an integrated NPU (neural processing unit) specially designed to run machine learning algorithms.

Qualcomm's automotive business is also doing well, as semiconductors play a bigger role in the transportation industry as trends like electrification and autonomous driving accelerate. Semiconductor content in cars is also surging. According to Deloitte, electronics make up 40% of the total cost of a new car, up from less than 20% in 2000. That figure is expected to exceed 45% by the end of the century. Qualcomm's automotive revenues rose 35% year over year to $603 million in the second quarter of fiscal 2024. The company's Snapdragon Digital Chassis solutions, a set of cloud-connected platforms for automotive telematics and connectivity, currently have a design orders pipeline of about $45 billion. Qualcomm has indicated that it is growing its market share and expects automotive revenues to exceed $4 billion by fiscal 2026.

Currently, optimism around artificial intelligence and Qualcomm's automotive business has driven the company's stock price up 35% from $150 in early January 2021 to around $205 today. In comparison, the S&P 500 Index is up about 40% over the last three years. That said, QCOM's stock price gains have not been consistent. The company's stock price returned 20% in 2021, -40% in 2022, and 32% in 2023. By comparison, the S&P 500 Index returned 27% in 2021, -19% in 2022, and 24% in 2023. QCOM underperformed the broader index In 2021 and 2022.

In contrast, Trefis' high-quality portfolio Outperforming the S&P 500 every year Over the same period, it has delivered higher returns with less risk than the benchmark index. The HQ Portfolio performance metrics show less rollercoaster volatility. Given the uncertain macroeconomic environment with rising interest rates, QCOM may face a similar situation in 2021 and 2022. Underperforming the S&P Will we see a significant upswing over the next 12 months or so?

Qualcomm shares are trading at about $204 per share, or about 22 times FY24 consensus earnings. This is not a high multiple, but there are some concerns. Qualcomm's revenue is likely to grow very little this year. In addition, competition in the company's core mobile chipset segment is also heating up. For example, China's Huawei's new smartphones will feature its own Kirin processors going forward, which will reduce Qualcomm's sales. There is also speculation that Samsung may also drop Qualcomm processors in its next flagship in favor of its own Exynos chip line. We expect Qualcomm shares to trade at $189, just below the current market price of $204. Qualcomm's evaluation: Is it expensive or cheap? For more information on what factors drive our stock price forecasts, please click here.

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