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SUMMARY
Parkev Tatevosian, CFA, analyzes Qualcomm's latest quarterly performance, highlighting its accelerated growth in the automotive segment and strategic entry into the data center industry. He underscores Qualcomm's proven track record in new markets and reiterates his view that the stock remains undervalued despite recent gains.
MAIN POINTS
- Qualcomm anticipates 50% year-over-year growth in its automotive segment, which could increase its share of total business from 13% to 20% within three to six quarters.
- The company expects initial shipments for a custom silicon engagement with a leading hyperscaler, marking its entry into the data center industry.
- Qualcomm leverages its acquisition of Alpha Wave and Connectivity to enhance its custom ASIC capabilities, targeting customers seeking proprietary chips for data centers.
- A multi-generation agreement with a large hyperscaler is set to begin product shipments by year-end, signaling a long-term partnership in the data center sector.
- Qualcomm's demonstrated success in PC, smartphone, and automotive CPUs supports optimism for its data center ambitions, with further details expected at the upcoming investor day.
- Despite recent stock gains from $120 to $204 per share, the analyst maintains a fair value estimate of $234, viewing the stock as undervalued but noting risks if the data center expansion falters.
DETAILED ANALYSIS
Qualcomm's latest financial update reveals a company in the midst of significant transformation, with its automotive segment poised for accelerated growth. Management forecasts a 50% year-over-year increase in automotive revenue for the upcoming quarter, suggesting this division could soon represent a larger portion of total business—potentially rising from 13% to 20% within the next three to six quarters. This shift comes despite ongoing headwinds in the smartphone market, where Qualcomm remains confident in its long-term revenue targets.
A major highlight is Qualcomm's strategic entry into the data center industry, one of the fastest-growing sectors globally. The company announced it will begin initial shipments for a custom silicon engagement with a leading hyperscaler later this year. This move positions Qualcomm alongside industry giants such as Intel, AMD, Broadcom, Arm, and Nvidia, all of whom are benefiting from the surge in data center construction by major cloud providers like Alphabet, Microsoft, Amazon, Meta Platforms, and Oracle.
Qualcomm's approach leverages its expertise in CPU technology and its recent acquisition of Alpha Wave and Connectivity, which has enhanced its capabilities in custom ASICs—components increasingly sought after by hyperscalers aiming to reduce reliance on Nvidia and develop proprietary chips.
The agreement with the unnamed hyperscaler is described as multi-generational, spanning several years and product cycles, indicating a long-term strategic partnership. This expansion builds on Qualcomm's proven track record in successfully entering new markets, including PCs and automotive, and underpins the analyst's optimism for its prospects in the data center space. The analyst recently upgraded Qualcomm to a top buy, citing a fair value estimate of $234 per share—up from a prior estimate and above the current market price, even after applying a margin of safety.
However, the analysis acknowledges risks, particularly if the data center initiative underperforms or diverts focus from core segments, potentially impacting overall revenue and profitability. Nonetheless, the risk-reward profile is deemed attractive for long-term investors as Qualcomm stands on the verge of entering a pivotal new market.
LINKS
- YouTube channel membership for early access, spreadsheets, and private Discord community.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a six-step investing framework.
- Discounted access to Fiscal.ai, a primary data source for investment research.
- Free monthly newsletter via Substack.