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thesis brief
Connectivity is the future and QUALCOMM (NASDAQ:QCOM) is the best modem and RF-front end for smartphones and nearby markets such as the auto and various IoT markets. As a result, it’s in a solid position to maintain its position as the go-to chipset for premium Android phones, but it also has great potential in emerging markets – in fact, it recently won multibillion deals with various automakers. Dollar deals. However, despite its industry leadership in connectivity and its growth outlook, it is trading at a substantial discount to intrinsic value and at a significant discount to peers.
QCOM is on discount
looking for alpha
At 11x P/E NTM and 3.6x EV/S NTM, it’s pretty clear that QCOM is at a discount. Similar to other technology names, QCOM suffered a slowdown due to the broad sector rotation from growth technology names into protective consumer staples. Like many other times of market turmoil (December 2018 and March 2020), this is a great opportunity for investors to add high-confidence and high-quality names that can emerge from the crisis and thrive in the years to come. Huh.
looking for alpha
After a market turmoil, there will be companies that will make great returns over time and give compound returns, and there will be companies that cannot revive growth and produce results, and therefore generate poor investor returns. After some in-depth research for our clients, we believe that QCOM comes first and this new earning has further strengthened our confidence.
The Core Handset Business Is Surprisingly Strong
A large part of the bearish thesis around QCOM has been the recent headwinds towards global consumer spending. As inflation continues to be high and consumer confidence is low, we are seeing a softer spending pattern for consumer technology and this has led to a decline in major semiconductor names and even fintech names as they become part of the broader consumer economy. are in touch.
Moreover, the sudden outbreak of COVID-19 in China heightened the bearish sentiment against QCOM. QCOM is heavily dependent on Chinese OEM vendors to procure Snapdragon chips and assemble them as the final smartphone product for consumers globally.
According to several reports including Counterpoint, the new lockdown has hit the Chinese smartphone market to a great extent. If this trend continues, shipments to the Chinese market could fall back to 2008, at which time the smartphone was introduced.
This has scared many investors, especially institutional investors. As a long-term fundamental equity research firm, we generally don’t pay too much attention to volatile quarterly results that can be non-indicative of the firm’s long-term outlook. However, we are surprised by the tone of the management in terms of their confidence of maintaining the handset business growth at 50% this year.
Qualcomm
Qualcomm
For context, the handset business grew 56% year-on-year, but QoQ grew less. That means the company needs a second boost in 2H22 to meet their guidance. Obviously the management has full confidence in this. Management cited a strong demand on supply position, strong growth in premium Android devices (while most of the impact in the Chinese market is on the lower end), near-sure-to-repeat holiday season demand, and the launch of a new flagship platform. in September.
More specifically, a large part of the growth has been contributed by QCOM’s further strategic dialogue with Samsung (OTC:SSNLF). Samsung’s latest flagship uses the Snapdragon chip in the S22c. 75% of the volume vs. c. 40% last year for S21. As the largest seller of premium Android phones, Samsung’s decision to increase the use of QCom chipsets gives a major boost to the handset business.
It does not come without a cost, however, as Samsung reached an agreement with QCOM on further lock-in of QCOM by using Samsung’s older process nodes. Samsung is fast trailing TSM in the fab business. For context, though QCOM and Samsung marketed the Snapdragon 8Gen1 as the most powerful mobile SoC ever produced by a 4nm process node. It’s pretty clear to everyone in the fab world that Samsung’s 4nm is no different from its 10nm from a few years ago, with only a slight improvement in power efficiency. At the same time, TSM is making steady progress in its advance nodes and its latest 4nm takes Samsung forward by 1-2 more generations. By choosing Samsung’s own fab over TSM, Samsung made concessions to QCOM. Samsung confiscated its proprietary Exynos fabless unit and opted to more aggressively adopt QCOM’s chipset. Samsung also provides fab solutions close to COGS, which should mean the highest GM possible for QCOM.
More specifically, thanks to QCOM’s deal with Samsung, Samsung’s latest flagship uses the Snapdragon chip in the S22c. 75% of the volume compared to C. 40% volume in S21 last year. The deal also includes manufacturing of the Samsung Snapdragon chip, which has some implications:
1) Selecting a less advanced node over TSM’s 4nm node provides substantial cost savings for QCOM and is supportive of gross margin.
2) To drive economies of scale, Samsung’s phone business unit has ordered loads of these Snapdragon chips to make less margin meaningful.
Although, 3) TSM’s abandonment of the 4nm node means that QCOM has sacrificed significantly in performance, which makes iPhones even more attractive, and now the Samsung deal means QCOM is locked in an old process.
However, in the long term, we still see QCOM as the best player for SoC (system-on-chip), as it owns the best modem and best RF front-end, and has Nuvia’s best performance. The upside is potential, which have a good chance of gaining a strong foothold in the server market. If you believe that QCOM’s position in the smartphone market is well protected, then QCOM is trading at a reasonable discount.
Non-handset business is the future
Reasonable discount only means good investment opportunity. We need more parabolic upside potential to make this a great investment opportunity. We are surprised to see that QCom is already making significant progress in executing its diversification strategy.
Our long-standing thesis is that connectivity is at the core of many intelligent edge devices, including consumer and industrial IoT, wearables, and automobiles; However, compared to the AI/ML aspect of autonomous drives and IoT, the connectivity aspect appears to be less publicized. Particularly for autos, once autonomous drive technology is commoditized, we see connectivity that will bring better in-car digital experiences as a real value adder. Furthermore, QCom’s enormous amount of knowledge in collaboration and nurturing the OEM ecosystem will be a core competitive advantage, especially when it is competing with vendors such as NVDA, who may have better technology.
Qualcomm
In the quarter, QCOM announced that they had entered into deals worth $16bn with auto makers. There is a particularly strategic deal made with BMW (OTCPK:BMWYY) whereby QCOM will supply chips for BMW’s efforts to replace the digital cockpit.
We believe the Arriver acquisition has given QCOM a very compelling auto SoC solution for almost every auto manufacturer bar TSLA, catalyzed by Gas Auto and adding value and better against TSLA, NIO and other EVs. Some other way is needed to compete.
In addition, QCOM announced the latest chip for WiFi7 connectivity. This is another area where QCom was new to the space but quickly took over market share and established itself as the undisputed leader.
Management also reaffirmed its optimism on the tablet and notebook business. We agree that the overall trend for Android devices, including tablets, smartphones and Chromebooks, will remain strong. These tools have traditionally been centered around price leadership rather than high ASP (Average Selling Price). As Microsoft (MSFT) tries to fight back against Apple (AAPL) M1 Macs, we’ll see more GTM success with Nuvia technology for QCOM’s PC SoC.
Satya Nadella Moment?
Another major discounting factor for QCOM is its management chaos. The founding father and son’s leadership has been challenged by regulatory concerns, and subsequently the QCOM board of directors found it difficult to find a great leader to lift QCOM out of regulatory turmoil and restart growth. Cristiano Amon, a longtime Brazilian engineer at Cucom, was selected as CEO in 1Q21. It is a similar move to Pat Gelsinger’s return to Intel (INTC). Although Amon appears to be less stellar and accomplished than Gelsinger – in the absence of a prime timeline of achievements and leadership.
In many ways, we can draw possible parallels between QCOM’s Amon and MSFT’s Satya Nadella. Both of whom were little known to the general public but worked for years at the firm. Nadella regained control of MSFT at a time when the company was facing growing challenges including anti-legacy Windows and Office businesses, mobile businesses, disorganized business units and an ambiguous culture. Nadella surprisingly emerged as a strong leader who has successfully guided MSFT into new areas of business where it can capture long-term tailwinds while leveraging its existing capabilities and customer base.
We see Amon’s new strategy for QCom centered around connectivity as a fit for QCom, and we will continue to monitor its progress in the foreseeable future.
Evaluation and future expectations
We expect QCOM to be able to grow more and more an annual 10% During Maintain over the next five years A 25% FCF Margin. We view QCOM’s management’s long-term guidance as fairly conservative and there is a fair amount of room for QCOM to beat estimates.
Our DCF model gives the EV of QCOM at c. $340bn, which represents over 100% at the current price. We believe QCOM’s EV/S should stand at least 10x EV/S, given its strong future potential and highly profitable unit economics. In addition, QCOM’s EV/NTM EBITDA stands at just 8.8x, a 50% discount to the typically low-growth but highly profitable legacy technology business.
It is very clear that the market is making pricing in a very challenging demand for QCOM in the coming years. While we believe the handset business may soon face a tailwind, we see QCOM’s connectivity story as a very reassuring story for our deep dive. If you believe that QCOM’s leadership in premium Android phones is not fading away, and its pipelines in Autos, IoT, Wearables, and PC are solid, then in our opinion, you should consider QCOM as part of your technology portfolio. You should consider adding from the middle to the middle. -Low volatility and solid future returns.
