Why discuss Qualcomm?
Qualcomm (ticker: QCOM) has a key position in the global technology industry, especially in the development of mobile phones in the past three decades, and it still does. This is the first factor.
Another reason to discuss this company is more important, because in the past 4-5 years, this company has quietly undergone corporate transformation, the most important of which is to no longer rely heavily on mobile phones as the only source of revenue and expanded its product line. Diversification, from the current point of view, Qualcomm is indeed progressing smoothly, and the transcripts handed over prove to be successful. It is very difficult for companies to diversify their products, and the chances of success are not high. For details, please refer to the description of another article in my previous blog post “The valuation impact of diversity to listed companies“.
The importance of Qualcomm
This is a company that I mention a lot in my book of “The Rules of Super Growth Stocks Investing”. There are two main parts, which investors who study Qualcomm must carefully understand:
- Subsections 2-3: This subsection has a lot of space to discuss the Qualcomm QTL division (Qualcomm Technology Licensing)
- Subsections 3-7 discuss the global supply chain of the electronics industry
Qualcomm was as important in the mobile phone world five years ago as Intel (ticker: INTC) was in the personal computer world. Now due to multiple factors (including competition from MediaTek, the imminent loss of Apple, the regulation of the US government, etc.), its dominance has declined, but it is still the most important company in the mobile phone industry, and its dominance has only declined, but it has not disappeared or significantly degree of weakening.
How does Qualcomm make money now?
| BU-group | Financial year 2021 |
| QCT (Qualcomm CDMA technology: chip) | 27.019 billion +63.82% |
| – QCT-handheld | 16.83 billion+60.88% |
| – QCT-RF Front End | 4.158 billion +76.04% |
| – QCT-Auto | 0.975 billion +51.4% |
| – QCT-IoT | 5.056 billion +67.09% |
| QTL (Qualcomm Technology Licensing) | 6.32 billion +25.7% |
| QSI (Qualcomm Strategic Initiatives) | 0.045 billion +25% |
| Total revenue | 33.566 billion +42.65% |
| Gross margin | 57.51% |
| Operating margin | 29.16% |
| Net margin | 26.94% |
Qualcomm market valuation
| Index | QCOM | MTK |
| Market Capital | 156.45 billion | 46.18 billion |
| Share price | $139.69 | NTD 830 |
| P/E | 14.3 | 11.82 |
| P/S | 4.62 | 2.67 |
| Yield | 2.15% | 4.46% |
Stock performance in past 5 years
The blue curve in the figure below is the performance of Qualcomm’s stock price, which has risen by 284.26% in the past five years; the red line is MediaTek, which has risen by 169.78% in the past five years.
China is the lifeblood of Qualcomm
60-70% of the total revenue comes from China. China is Qualcomm’s No. 1 market. Qualcomm should be the company that relies the most on the Chinese market among all the large listed companies in the US that I know. Because now, apart from Samsung and Apple, the two major mobile phone manufacturers, the world’s major mobile phone manufacturers are all Chinese manufacturers. Even in Qualcomm’s newly developed IoT and automotive businesses, many of the major manufacturers are in China.
This is why, under the geopolitical game, China imposed an antitrust fine of US$975 million in 2015, and the patent royalty was reduced to 65% after negotiation. Qualcomm has no second sentence at all, and can only pay it off immediately. Because there is no Chinese market, Qualcomm simply cannot survive.
What about Apple?
Qualcomm generates 20-25% of its revenue from making modem chips for Apple (ticker: AAPL). Note that the 20-25% of revenue from Apple is the same as Apple’s share of TSMC’s (ticker: TSM) total revenue. Have you noticed that Apple’s revenue plus 60-70% of its total revenue comes from China. When the two add up, it is almost 95% of Qualcomm’s total revenue. Samsung mostly uses its own chips, but it also uses Qualcomm in some products, but not much.
But if Apple is not surprised, it will start producing its own modem chips next year, and then it will gradually abandon Qualcomm. Qualcomm admitted in November 2021 that by 2023, the proportion of Apple’s iPhone, iPad and other products using Qualcomm modems may drop sharply to about 20%. This is also the reason why Qualcomm desperately had to file a lawsuit with Apple and get back the money (mainly the authorization fee) Apple owed Qualcom for a long time. More importantly, Apple, the golden goose,will be gone next year, forcing Qualcomm to find another source of revenue; this is very important.
Personal computer
The Snapdragon 8cx and 7cx series of laptops are already the main force of Microsoft’s (ticker: MSFT) Surface’s non-x86 ARM processors, although the volume is far from Intel’s version, and it is also worse than AMD’s (ticker: AMD) Lots of shipments, but still the long-term champion of non-x86 ARM-based personal laptops on the market.
Recently, the CEO of Qualcomm said that the processor of the new self-architecture built with the technology owned by the previously acquired NUVIA company will be completed in the second half of 2023. Qualcomm announced that the performance of this Arm-based PC processor can not only match Apple’s M series, but also reach the performance level of Intel i7. If it is true as Qualcomm said, it will be able to a milestone for it on the personal computer. But it is impossible to replace Intel, because there are very few programs developed for the Arm architecture.
Alphabet’s (ticker: GOOGL and GOOG) Chromebooks powered by the Snapdragon 8xx series or upgraded processors, already under the test for a while, may also be available in the near future.
Relationship with TSMC
As mentioned earlier, Qualcomm’s 20-25% of revenue is from Apple, which is the same as Apple’s total revenue for TSMC. Qualcomm itself is TSMC’s fourth largest customer, accounting for about 3.9% of TSMC’s total revenue (2021 data). However, since TSMC will always leave the most advanced process and production capacity to its largest customer, Apple, this policy affects other large customers such as NVIDIA (ticker: NVDA) and Qualcomm, and Qualcomm’s demand for wafer foundry (regardless of volume, advanced manufacturing process) is very large, unable to grab TSMC’s priority level, so it has to settle for the second best, and place many orders to Samsung.
And in order to obtain Qualcomm, a major customer, Samsung has cut prices by more than 20% just to keep Qualcomm’s orders. Samsung can meet Qualcomm’s production capacity requirements, but Samsung’s yield rate, product performance, and the record are really poor, which has always been a headache for Qualcomm (see my book “The Rules of Super Growth Stocks Investing” in section 3-3, Samsung’s discussion).
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