Qualcomm (QCOM) $137.50
Qualcomm is an underappreciated GARP (Growth At A Reasonable Price).
Apple stays on as a handset customer for an extra two years than originally planned, till FY 2027. Clearly, developing in-house modems is an enormously difficult undertaking and even the mighty Apple is still struggling to achieve the same levels of expertise and product quality that Qualcomm provides.
Qualcomm’s crown jewels of extensive, essential patents for wireless networks, such as a near-monopoly in 3G wireless networks, a large share of 4G patents, which contributed enough innovation to warrant earning royalties on virtually all 4G devices and a good portion of essential patents with 5G – ensure a lucrative stream of royalty revenue from most cell phones.
The crown jewels continue to bolster and monetize the business.
Qualcomm’s auto segment should power growth for the next decade.
Qualcomm has a large auto pipeline of $30Bn through 2030, larger than Nvidia’s $14Bn and Mobileye’s $22Bn. I expect the auto segment to grow from $1.9Bn to $4.3Bn by FY 2026, a CAGR of 33% in the next 3 years.
Qualcomm’s main strengths are:
- Its connectivity, from its decades of experience in the cell phone industry.
- The one-stop shop integrating ADAS, Infotainment, Car to Cloud services, and connectivity.
- Its massive capacity to scale and handle the complexity needed to manage different systems, stacks, and vendors.
- Building a better platform at scale – Qualcomm would be the digital chassis for traditional ICE automakers
- Unlike Mobil Eye, Qualcomm could take market share by being more flexible and building heterogeneous SoCs the way they did in phones and IoT.
Given the emphasis on technology and the high growth, Mobileye, Qualcomm’s largest competitor is valued at a whopping 16x revenues. I don’t believe the markets are valuing the strength of Qualcomm’s $30Bn pipeline and 33% growth correctly and see this as an opportunity to buy.
The Company’s lucrative treasure trove of patents in connectivity should continue to ensure high-margin revenues for a long time.
Its Snapdragon technology in partnership with Microsoft can find opportunities in the PC space.
The auto industry, as it moves towards autonomous driving, is an extremely difficult one to work in with its maze of regulations, emphasis on safety, adherence to stringent quality standards, and the time from pipeline to production, which sometimes stretches up to 7 years. ICE (Internal Combustion Engine) automakers have to make a paradigm shift embracing technology as the main driver and not looking at digitization partners as parts suppliers.
