AI should help this communications stock better connect with investors

 

  • In the AI race, investors should not forget about Qualcomm.

 

Will Healy (Qualcomm): Of the major AI chip stocks, few appear better positioned for buyers than Qualcomm (QCOM -0.81%). It had become an afterthought for investors as the 5G upgrade cycle ran its course.

However, that has changed thanks to AI, as smartphones equipped with the Snapdragon 8 Gen 3 or the Elite Mobile Platform chipsets delivered on-device AI to smartphone users. Moreover, Qualcomm has thought ahead to the day when smartphone use would fall. Hence, the company has expanded into IoT/industrial, automotive, and PC chips.

In fact, its automotive segment was the fastest-growing segment in fiscal 2024 (ended Sept. 29), increasing revenue by 55%. Still, it only makes up just over 7% of the company’s revenue.

For now, handsets were 64% of the company’s revenue, and that segment’s revenue grew 10% yearly amid an AI upgrade cycle.

Admittedly, its handset business faces notable challenges. Apple (AAPL -1.32%) has tried for years to develop a comparable chipset, and it is in a legal dispute with Arm Holdings (ARM -0.38%), which Qualcomm depends on for some chip designs.

Nonetheless, Apple has tried for years to best Qualcomm's designs only to extend the supply agreement. As for its dispute with Arm, that dates back to 2019, though it has continued to thrive despite that legal battle.

For now, Qualcomm benefits from an upcycle. In fiscal 2024, the company’s $39 billion in revenue increased by 9%. However, in Q4, revenue rose by 18%, signaling an upward move in the cycle is benefitting the company. Also, costs and expenses rose by only 3%, allowing Qualcomm’s $10 billion in net income for fiscal 2024 to surge 40% higher compared with year-ago levels.

Amid this growth, Qualcomm trades at a P/E ratio of 18, far below other chip industry competitors. While the dispute with Arm carries some risk, its diversification into other areas makes its success likely, with or without Arm’s chip designs.