Company Overview
Qualcomm Inc is a leading wireless technology innovator. It develops and supplies integrated circuits and system software based on 3G/4G/5G and other technologies, including radio-frequency front end (RFFE), for use in mobile devices, automotives, consumer electronic devices, and industrial devices. Its segments include the QCT (Qualcomm CDMA Technologies) semiconductor business and QTL (Qualcomm Technology Licensing) business.


Investment Overview
Leading communications semiconductor & solutions company. QCOM is a beneficiary of the growing 5G opportunities in the premium handset, automotive, IoT, and edge networking segments. Recently announced product line-up as well as its blue-chip customer bases attest to its competitive edge in each of the respective sub-sectors, e.g., Apple and Samsung in handset; Mercedes and BMW in automotive; and partners like Windows and Microsoft in IoT. Inroads into 1) Gen AI smartphones through Snapdragon as well as 2) PC chips market are further positive developments to watch.

Diversification away from handset to more stable, fast-growing sectors. Current Apple agreement that is expected to last until 2026 and growing partnership with leading Chinese OEMs ensure earnings visibility for the handset segment. Looking further, QCOM looks to diversify its business into the non-handset segments to (i) offset cyclicality associated with the global smartphone industry, and (ii) tap into areas of higher growth potential. In its 5-year growth roadmap, management has guided for diversification away from its core handset business, with an additional USD22bn in annual revenue through its other operating segments. Its projection puts automotive as the largest growth driver, with an annual revenue target of USD8bn (vs. USD1bn as of 2QFY25). Others including PC, industrials and other IoT segments are expected to see annual revenue increases of c. USD4bn.

Stability in consistent capital return policy. We have a positive view on QCOM's strategy to strongly position itself in the QCT business, diversify into fast growing segments, improve operating efficiency, and obtain stability in the licensing business. QCOM's consistent capital return policy shines among the cyclical, low-yielding semiconductor industry. The company continues to grow its dividend per share each year, with a trailing 2%+ dividend yield at May-25 levels. Management’s commitment to raise its capital return target to 100% of its free cash flows for FY25 reflects its strong cash flow generation ability.

We maintain our BUY rating on QCOM with lower TP of USD180 per share (prev. USD215), pegged slightly above 6.5X P/BV (or -0.5SD of 5-year average). While we are positive on QCOM’s longer-term outlook, the 3QFY25 guidance nevertheless reflect uncertainties involving tariffs impact and consumer demand over the near-term. While management emphasised that no material direct impact from tariffs has been observed thus far owing to its diversified global supply chain and strong market positioning, the potential for indirect effect through softer consumer demand cannot be ruled out entirely. Its higher proportion of sales to China (46% of revenues in FY24) may also be a point of contention should the US-China tensions escalate further.


Risks
Include (i) weaker-than-expected outlook for smartphones (64% of FY24 revenue), and (ii) slower-than-expected recovery in China’s demand (46% of FY24 revenue)