Qualcomm’s (NASDAQ) advancements in on-device AI chip functionality position the company to capitalize on the increasing demand for AI-capable devices. With deep integration into major smartphone manufacturers’ supply chains and growing consumer interest in AI-enabled smartphones, Qualcomm is set to benefit significantly from these trends. Despite concerns about the U.S. chip ban affecting Qualcomm’s business in China, the company’s diversified exposure and recent financial performance suggest these fears are overstated. Qualcomm’s innovations in AI and 5G technologies, combined with the global shift towards advanced consumer electronics, support a strong buy rating for the stock.
Background
Qualcomm’s Snapdragon 8 Gen 3 Mobile Platform enables smartphones to support up to 10 billion parameters of generative AI models solely on-device, transforming them into intelligent personal assistants. The incorporation of AI capabilities like natural language processing and multimodal AI is rapidly changing user interactions with smartphones. Qualcomm’s mobile platform offers extensive support for various large language models, addressing privacy and security concerns by minimizing reliance on cloud-based solutions and reducing latency in AI functionalities. This is particularly needed in applications requiring immediate feedback, such as real-time language translation or decision-making aids.
Qualcomm’s shift towards AI-powered chips is timely. The company’s stock has seen a resurgence thanks to innovations in AI chip technology, positioning Qualcomm at the forefront of leveraging AI at the device level. Collaborations with major smartphone OEMs, such as Honor, iQOO, realme, Redmi, and Xiaomi, aim to expand the reach of Qualcomm’s AI chips on a wider range of consumer devices. The development and deployment of AI chips are becoming crucial in applications from mobile devices to automotive systems to handle complex AI tasks efficiently.
Unique Features of Qualcomm’s AI Chips
Qualcomm’s new generation of AI chips, the Snapdragon 8 Gen 3 and 8s Gen 3 platforms, are pioneering the smartphone industry by handling a maximum of 10 billion parameters for generative AI models directly on mobile devices. These chips allow for real-time, complex AI tasks without needing to connect to the cloud, integrating large language models like LLaMA 3 and Baichuan-7B directly into the device. The chips also feature always-sensing ISP, hyper-realistic mobile gaming, and breakthrough connectivity enhancements for enhanced multimedia experiences and superior connectivity solutions.
Engineered with Qualcomm’s Hexagon NPU, the chips offer up to 98% faster processing with 40% reduced power consumption. This is particularly useful in mobile environments where power conservation is essential. The AI Engine’s ability to perform tasks such as real-time voice translation and complex image processing locally underscores their utility in a world where edge computing is increasingly important. Qualcomm’s AI chips optimize specific calculations required by advanced AI models, executing large numbers of parallel computations to enable more efficient processing given the energy constraints of mobile devices. The strategic pricing of these chips brings premium features to more affordable smartphone models, expanding public accessibility to advanced AI capabilities.
Agreement with Apple
Apple has renewed its contracts with Qualcomm, ensuring necessary components to support future smartphone releases while continuing to develop their technology. The multi-year deal involves supplying Snapdragon 5G Modem-RF Systems to Apple’s smartphones through 2026, marking a halt in Apple’s push towards self-reliance in modem technology. This underscores Qualcomm’s expertise and specialized technology, which are not easily replicated, particularly for advanced network standards like 5G.
Total Addressable Market (TAM)
While the TAM for Qualcomm’s AI chips cannot be precisely estimated, management has indicated strong upside potential. At the Bernstein Conference, it was highlighted that the transition of the enterprise to Windows 11 to AI PCs, driven by Microsoft Copilot, is expanding Qualcomm’s addressable market. The overall PC market is set to grow to $270 billion annually by 2028, with an estimated 205 million AI-enabled PCs. With a projected 10% market share, Qualcomm could see $4.1 billion annually in AI PC chip revenue. This, combined with AI smartphone chip revenue, suggests significant growth potential for Qualcomm’s business.
Valuation
Despite the forward-looking growth estimates for AI-driven smartphone technology, Qualcomm’s forward non-GAAP Price-to-Earnings (P/E) ratio stands at 20.85, slightly below the sector median of 23.77. This discount suggests that the market is undervaluing Qualcomm’s potential revenue growth. Aligning Qualcomm’s forward non-GAAP P/E ratio with the sector median implies an approximate 14% increase in stock price, assuming earnings projections remain constant.
Risks
The revocation of licenses by the Biden Administration for Qualcomm (QCOM) and Intel (INTC) for exporting semiconductors to Huawei has heightened trade restrictions between the U.S. and China. Qualcomm’s significant exposure to the Chinese market, where it has capitalized on the demand for AI-enabled smartphones, presents a risk. However, Qualcomm’s diversified market across multiple manufacturers mitigates dependency on any single entity, such as Huawei. Additionally, Qualcomm’s broad product portfolio and market presence help offset potential revenue losses from geopolitical tensions.
Bottom Line
Qualcomm’s advancements in AI chips position the company at the forefront of a transformative phase in mobile technology. The growing demand for AI-enabled devices will drive further growth for Qualcomm, despite potential geopolitical risks. Qualcomm’s diversified market presence and strategic innovations support a strong buy rating for the stock. The anticipated massive upgrade cycle in AI smartphones will significantly boost Qualcomm’s business, overshadowing potential risks from geopolitical tensions with China.
Discover more from TEN-NOJI
Subscribe to get the latest posts sent to your email.
