Mobile chip leader Qualcomm (NASDAQ: QCOM) has taken a beating this year. A nasty downturn in the smartphone industry — driven by a sharp dropoff in consumer demand — has made the excess inventory of mobile semiconductors a persistent problem. Revenue and profit have been down dramatically as a result.
Things were looking even worse as Qualcomm was forecasting no revenue from Apple starting in 2024, as Apple has been clear it’s been working on its own 5G connectivity chips to cut companies like Qualcomm from its supplier list. But Qualcomm and Apple just announced a new 5G chip supply agreement has been struck after all, and Qualcomm stock is rallying. Is it time to buy the depressed chipmaker?
As a reminder, back in 2019, Apple acquired the smartphone modem business (which designs chips for mobile connectivity) from Intel for $1 billion — chump change for Apple. The potential payoff for Apple could have been massive, though; 5G connectivity chips from Qualcomm, as well as fellow Apple 5G connectivity supplier Broadcom, haul in many billions of dollars a year from Apple product sales.
I was always skeptical about Apple’s ability to shake Qualcomm or Broadcom. Not only would Apple have to find a viable workaround to those companies’ chip designs, but they’d also have to go out and find a third-party manufacturer. It’s a little-known fact that Qualcomm and Broadcom have maintained ownership of connectivity chip manufacturing facilities, making them a deeply entrenched duo in the industry.
There was, nonetheless, plenty of speculation about Apple’s parting of ways from both Qualcomm and Broadcom, including from industry analysts. Apple has now renewed supply deals with both, first with Broadcom back in May 2023, and now with Qualcomm, too.
The Qualcomm press release was simple, stating that Apple would continue using Qualcomm Snapdragon 5G Modem‑RF (radio frequency) Systems through 2026 for its iPhones. In an accompanying slide, Qualcomm said this agreement has similar terms to the previous agreement and that the total share of iPhone 5G modems will be about 20% in 2026 (Apple, like other large device companies, tends to source parts from multiple suppliers). Qualcomm’s existing technology licensing related to 5G networks to Apple through 2025 remains unchanged.
Qualcomm does not divulge how much of its nearly $39 billion in trailing-12-month revenue it gets from Apple, but some analysts point toward it being as much as 20% (or $7 billion to $8 billion a year). Suffice it to say that losing Apple would have been a bad deal.
But that was the wall Qualcomm shareholders were staring down. On the last earnings call, Qualcomm said it was expecting sequential growth for its first quarter of fiscal 2024 (the final three months of calendar year 2023) but has said it was modeling for no significant Apple revenue starting in calendar year 2024. With the new iPhone lineup through 2026 now set to have Qualcomm chips in them, that risk of sales dropoff is now gone.
This seems to imply Qualcomm can return to sequential (quarter-over-quarter) revenue growth into 2024, assuming a general recovery in smartphone sales finally begins.
Q3 fiscal 2022
Q4 fiscal 2022
Q1 fiscal 2023
Q2 fiscal 2023
Q3 fiscal 2023
Q4 fiscal 2023 estimate
$8.1 billion to $8.9 billion
Q1 fiscal 2024 estimate
Throughout this downturn in the mobile chip market, Qualcomm has remained highly profitable by every metric. It’s been repurchasing stock and has continued paying a growing dividend (currently yielding 3% a year as of this writing).
Of course, Qualcomm still has risks it needs to deal with, including new competition in China after Huawei announced its triumphant return to the smartphone market with the Mate 60 Pro with an in-house designed advanced chip and 5G connectivity (Qualcomm was only supplying Huawei with 4G chips up to this point since the U.S. banned the sale of 5G back in 2020). But at less than 15 times trailing-12-month earnings and just 18 times trailing-12-month free cash flow, Qualcomm still looks like a reasonable value here if the smartphone market finds a bottom in the next couple of quarters. Having Apple back in the fold will certainly help.
It’s going to take time, though, and it could be a very bumpy ride through the end of 2023 and into early 2024. A bit of prudence is probably still warranted here.
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Nicholas Rossolillo has positions in Apple, Broadcom, and Qualcomm. The Motley Fool has positions in and recommends Apple and Qualcomm. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.
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