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Share tip: Qualcomm’s recent results surpassed broker expectations despite competition
Even the most entrenched AI convert will agree that this particular technological revolution is not happening overnight, but in waves. If euphoria about interactive large-language models like ChatGPT marked the first big iteration of AI’s power, then the next looks likely to be the technology’s transfer to our mobile phones and PCs.
As AI-powered chips become both more potent and efficient – and less reliant on data centres and the heavy use of electricity – the possibilities for a new age of smartphones and personal computers are almost boundless.
Practical features such as voice automation, language translation and high-accuracy transcription should all in time become a reality.
Unsurprisingly, a whole new range of companies stand to prosper, the more mainstream AI becomes. Among them is Qualcomm, the US-listed chip designer that is the dominant supplier to the world’s Android smartphone manufacturers.
It even supplies some 5G chips to Apple, which is famed for creating the majority of its parts inhouse. That said, worries about Apple’s ongoing efforts to develop its own 5G chips – and attempts by Samsung – along with the possibility of a broader slowing of the 5G upgrade cycle, all played a part in the stock’s sharp sell-off during this summer’s tech carnage.
Yet third quarter results from the company were very strong, beating brokers’ expectations. And the California-based chip company, whose products include the Snapdragon “system on chips”, has been setting its sights on other markets in part of its bid to capitalise on AI.
Qualcomm-designed chips power some of Facebook-owner Meta Platforms’ virtual and augmented reality headsets, for example. Its processors run some Lenovo, Microsoft, HP and Dell laptops and, in 2021, it spent $1.4bn (£1.1bn) buying tech start-up Nuvia to help its push into PCs.
For these and other reasons, Qualcomm has been moved on to the buy lists of some of the world’s best-performing fund managers. A total of 20 top professional investors own stakes in the group, each of them among the top 3pc of the more than 10,000 equity managers tracked by financial publisher Citywire.
Qualcomm’s Nasdaq-listed shares are available through most UK brokers, but those interested in following suit should ensure they fill in the appropriate paperwork to minimise their exposure to dividend withholding taxes.
Bill Smead, an investor who holds Qualcomm stock in his $5.9bn Smead Value Fund that he runs with his son Cole, argues the wider stock market fails to give the company credit for its achievements. “Investors underestimate its consistent reinvestment in research and development [R&D].”
Last year Qualcomm shelled out more than $8.8bn on R&D, a near 8pc increase on the previous year and equivalent to just under 25pc of its annual revenues. Based on the same benchmarks, that’s on a par with Meta.
Smead added that the company’s shares trade at a “reasonable” price-to-earnings ratio of just under 16 times next year’s forecast earnings. It represents a far cheaper way to gain AI exposure than other chip designers, such as Nvidia. The prospective dividend yield, at 2pc, is modest, though Qualcomm does have a share buyback programme and is, after all, a company that still has plenty of other uses for its cash.
None of which is to say that it doesn’t have its share of challenges. A worldwide slump in smartphone sales and a post-Covid glut in supply depressed the group’s revenues and profits last year, albeit they still came in above analysts’ forecasts. It has also signalled that some of its AI-related costs will cut back its profit margins this year.
The company faces competition from China, too. Huawei, which used Qualcomm-designed chips for years, will now make its own. It is also reliant on AI breakthroughs to rejuvenate the smartphone market, where consumers have been refusing to pay top dollar for new handsets.
Nevertheless, analysts are bullish about the prospects for the company, including in areas such as autonomous cars and the Internet of Things. Last year’s sales are forecast to rise by 25pc to more than $45bn over the next three years, while pre-tax profits are set for a 42pc boost in the same period. And by that time, Qualcomm should be debt free and cash rich.
Questor says: Buy
Ticker: NYSE:QCOM
Share price: $175.30
Miles Costello is a contributing journalist for Citywire Elite Companies