Barron's Streetwise - Can Qualcomm’s A.I. Expansion Boost the Stock?

Episode Date: November 22, 2024

The chipmaker’s CEO, Cristiano Amon, stops by Barron’s to talk about his plans. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. When you run AI, it's the edge. Edge is your phone, is your glasses, is your earbuds, is your watch, is your PC, is your car, is an industrial equipment, a robot. Everything that is not the cloud. And that's

where our silicon is going. We're now in every single market at the edge. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard is Cristiano Amon. He's the CEO of chipmaker Qualcomm, which is known mostly for its exposure to phones. But Cristiano wouldn't mind injecting more artificial intelligence buzz into the business and the stock. And he has a plan for that. He'll tell us about it. We'll also say a few words about Alphabet's potential breakup and NVIDIA's blowout earnings. Listening in is our audio producer, Jackson.

Hi, Jackson. Hi, Jack. It's been decades since antitrust officials in the U.S. broke up a big company, but that might be happening now. The Wall Street Journal reports that the Justice Department on Wednesday said Google should have to sell its popular Chrome browser as part of a court-ordered fix to its monopolization of the online search market. There's other stuff here beyond selling Chrome, not giving preferential access to its search engine on phones and whatnot that use the Android system,

not paying Apple to be the default search option on its phones. And no, you can't sell Chrome to someone else and then pay that someone else to be the default search option there. This was, I guess you could say, not well received by investors. The stock was down 6% over a couple of days, but the stock is still up nicely for the year. And you get the sense that it could have been worse, or maybe it couldn't have been worse. Because I was never quite clear on if you have a monopoly in search, right? The whole thing about search is you want to do your searching where everyone else is doing their searching, because that's where you find the most stuff.

So it's a business that just seems to lend itself to being a monopoly and you can't break up the search engine. You can't take a big search engine and break it into two search engines. So I was never quite clear on how this was going to work, but I think this is a pretty benign outcome or it has potential to be a benign outcome for investors. What do you think, Jackson? Yeah. Al Root, our friend at Barron's says that it may actually send the stock higher. It might get people doing like a sum of the parts analysis where you value each individual piece of the business. And they might come up with numbers that are higher than where

the business trades today. Al did his own math on that and came up with a number that was 30% higher than the recent value for the stock. And our colleagues at MarketWatch published a column back in August that compared a potential Google breakup with what happened with AT&T. Now that one's going back several decades. They talked about how the Justice Department tried in the 70s to split up IBM and it failed. And then it succeeded in splitting up AT&T into the baby bells. We've talked about that before. IBM stayed comfy, maybe complacent in the mainframe business. That was fine in the near term, but over the long term, it hasn't been great

for the stock. The AT&T split up, on the other hand, worked out very well for shareholders. We don't yet know the final details of what will happen with an Alphabet breakup, and I'm sure we will dig deeper into this subject in a coming episode. deeper into this subject in a coming episode. Meanwhile, NVIDIA, its earnings report was what, a blowout? It's not reflected in the stock. The stock didn't move much, right? Yeah. By the way, for people who don't know, when we say that the company is projected to earn this, that number comes from basically a poll. One of the data services goes out and conducts a poll of analysts, what do you think earnings will be? And then it averages those together and it comes up with a consensus number.

And depending on which poll you use, you can get different consensus estimates for earnings and other measures. And those are the numbers that companies have to beat. But for companies that make a habit of beating those numbers handily, you'll often hear about whisper numbers. People are saying, hey, it's actually going to be way above the consensus, just like last time. It's going to be this. And then sometimes the analysts will come out and write, here's the whisper number. That always sounds crazy to me. If you're writing it in a

report, it's not being whispered anymore. It's no longer a whisper number. You're publishing the number. Anyhow, I think the best measure of whether a company beat expectations on its earnings report is whether the stock price jumps. And in this case, it didn't really. But our Barron's colleague, Tay Kim, who just finished writing a book on NVIDIA and a cover story for Barron's on the company, he wrote, I wouldn't read too much into the initial reaction, which could easily be some profit taking given that the stock has roughly tripled this year. Instead, he wrote, investors should not overlook the unprecedented magnitude of NVIDIA's performance. Triple digit growth rates while making tens of billions of dollars isn't normal. He writes about the company's next generation Blackwell chips and staggering demand for them and how that should set the company up for a prosperous year next year too.

Okay, so why are we talking about Qualcomm? I'll tell you why, because Qualcomm's talking about Qualcomm. They hosted an investor day this past week and they laid out a plan for getting the stock price moving. I mean, I don't really say that's the point of the investor's day and companies never come out and say, Hey, the point here is we're trying to make the stock go up. I think that would be poor form, right? Yeah, I think so. Instead, they talk about how they're going to make more money. They put out a slide deck and the main phrase on the sort of first slide was enabling intelligent computing everywhere. And I wrote in Barron's

that if I had been hired to write a subheading for that slide, it would have been getting some AI stink on the stock. Chipmaking is the darling of Wall Street at the moment, but that is mostly to do with NVIDIA. When you look at the Philly Semiconductor Index, that tracks not just NVIDIA, but also companies that make chips for more workaday purposes. That Semi Index is actually trailing the S&P 500 this year. Its worst performer is Intel, which is down 51%. Intel's losing market share in both data centers and personal computers. So where does Qualcomm fit in in all of this? Well, somewhere in the middle. It has returned about 10% this year and 17% since Cristiano took over in the summer of 2021.

Both of those numbers trail the S&P 500. That is because, as you'll hear Cristiano explain in a moment, most of the company's revenues come from phones. Qualcomm makes central processors for smartphones and connectivity chips, and it gets about 75% of its revenues from handsets. And that's a big market, but not a super fast growth market. And that helps explain why Qualcomm stock trades at less than 15 times projected earnings. NVIDIA goes for more than 15 times projected earnings. NVIDIA goes for more than 50 times projected

earnings. In other words, there's only so many phones people can have. Unless we evolve an additional mouth and two more hands, I don't think volumes on smartphones are going to push much higher than they are now. But you can get rising content on phones and Qualcomm is still a growing company. It's a company that grew its revenues by 9% over the past year to just under $39 billion. It's certainly a profitable company. One issue facing Qualcomm is that key customers include companies like Apple and Samsung. And Apple and Samsung are big enough to have the finances and the manufacturing know-how to make some of their own chips. And that creates the potential to replace Qualcomm for content going forward. Apple has already announced plans to replace Qualcomm's 5G chips

in two of its iPhone models next year. That could create some lost revenue that the company will have to overcome. I asked Cristiano about that and you'll hear his answer. He also has a plan to reduce Qualcomm's phone revenue from 75% of total revenues today to around 50ets and the internet of things. And we'll hear about that and edge computing and where Qualcomm fits in. In my neighborhood, there's a bunch of, have you seen the coolers on wheels? I haven't seen them now. They're robots. At first I thought they were, you know, AI robots delivering people food. It turns out there's a, uh, don't say organ transplants.

Don't say these robots come and perform a surgery. No, no, no. They're going to take your appendix or do what? You know, they go on the sidewalk, they pick up food, deliver them to people's houses. Uh, but it's not AI driving them. It's people on a PlayStation controller sitting at home. So it's not AI driving them. It's people on PlayStation controllers sitting at home. So it's gamers. So all those video gamers have found a way to become productive members of the economy.

Some of them at least. Yeah. Okay. Let's get to my conversation with Cristiano. He stopped into Barron's offices in Midtown Manhattan. We spoke there. By the way, last time I saw him, he had a goatee, kind of a substantial goatee, and a mustache. And this time, his cheeks were filled in with a full beard. As I wrote in Barron's, I think that serves as kind of a metaphor for what

he's looking to do with the company. To get the stock price growing, he's got to do with computer chips what he's done with facial hair. He needs to expand richly into new areas. Some of the details of how quickly that can happen are fuzzy, but that doesn't mean it's not good news for the stock. We'll circle back to that point at the end. For now, on to my conversation with Cristiano. After this quick break, right Jackson, I'm going to shimmy that in here. Going to shimmy some ads in right now. We'll be right back. in here? Going to shimmy some ads in right now. We'll be right back. Welcome back. Let's play a part of my recent conversation with Qualcomm CEO, Cristiano Amon.

Nice to see you again, Cristiano. Nice to see you too. So you've been talking with folks for your investor day. Your company gets about three quarters of its revenue from phone handsets, correct me if I'm wrong on that. And you have a plan to diversify that. So you can talk to me about that if you would. Absolutely. Look, when we had an investor day in 2021, that was kind of the year I became CEO, we realized that there was a lot of markets that could benefit from our technology. We have always been the most focused company in mobile, and that's why mobile is our core business, is the majority of the revenue. But the technologies we had developed in our company, we realized it could be beneficial for industries that are going transformation,

like automotive. I think what's happening in personal computing, industrial, spatial computing. So we put, at that time, a plan to diversify and grow the company, and we'll be executing on that plan. So what we did yesterday, which was a 2024 investor day, to provide the scorecard, how have we done in that strategy? And I think we've done very well on automotive. I think we built probably the leading position in automotive across semi-companies. We have a $45 billion pipeline. We are entering the PC now with probably the most powerful processor for SPC changes to AI with Microsoft Copilot Plus. We have built a position for virtual reality, augmented reality, mixed reality, as well

as industrial. So what we did yesterday, we show investors, look at what we've done so far, and we put a timeline. By 2029, we expect to have about $14 billion of non-handset revenue. And when you look at the total IoT plus autospace, about 22, I'm sorry, 22 non-handset revenue, which gets the company, as we get to the end of the decade, to be 50-50, a fully diversified company, when mobile wire is still growing, is going to be about 50% of the total revenue. I saw one Wall Street report.

This is an analyst who has kind of a neutral rating on the company. He wrote, we estimate $15 billion drag from Apple slash Samsung share loss, making it difficult to model top-line growth over the next three years. He's talking, I believe, about Apple and Samsung making more of their own chips. share loss, making it difficult to model top-line growth over the next three years. He's talking, I believe, about Apple and Samsung making more of their own chips. But meanwhile, the estimates show revenue growth for your whole company over the next year. So in the years ahead, is it your expectation that the new business that you're bringing in will more than offset the effect of some of these big phone companies making more chips

in-house? I don't understand his Samsung comment because we're not losing share on Samsung. Actually, we're on the positive trajectory share of Samsung. And I think we'll probably expect to historically have much higher share that we had in the past. We have been very clear that we expect that the Apple, beyond the contract that we have, will start coming off the model. We have been very clear. The story is we thought we'll have – we're being very transparent.

Every time we have a contract with Apple, we had disclosed when it ends. We thought we'll start losing some of the Apple business in 23. That didn't happen. We thought 24. That didn't happen. losing some of the Apple business in 23. That didn't happen. We thought it would be 24.

That didn't happen. The latest contract we have, we expect to have about 20% of share in 26. And, you know, will that be the case? Will it be different? Will they renew? We don't know. But the reality is what we have done is as we have this plan of growth

and diversification of the company, we actually more than replaced the Apple diversification of the company, we actually more than replace the Apple revenue. So the company still have the ability to have annual growth as Apple comes off the model, and especially because of how successful the growth and diversification strategy on Alton IoT have been. When I look at your stock chart this year, I say, well, that looks like a fine performance for the stock. Although the S&P 500 is up even more because it's being pulled higher by some of these artificial intelligence companies. Your stock goes for about 15, I saw recently just right around 15 times forward earnings estimates. If you take a company like NVIDIA, obviously a totally different company

trading for more than 50 times earnings because of the AI excitement. Do you think that investors have it right about your company? I mean, they obviously, you know, everybody's looking for AI stocks and your company is not the first name that comes to their mind. Do you think that investors are right in that assessment? Are you becoming more of an AI company? Look, that's the right question. And I think there are two separate topics I think worth talking about. The first topic, because a lot of our revenues, the majority of our revenues is mobile, we get mobile multiples. Because mobile market is an incredible market. It's one of the largest consumer electronic markets in the world, but it doesn't grow because all of us have a phone. So it's more of a replacement rate market at this point. Maybe, maybe. I know for sure that's the case. I just don't know the year, but we could see in one year, in two years, three years. We don't know. We're going to see an

AI upgrade cycle could create a super cycle on phones. But right now, phones grows with GDP and replacement rates. I think people buy a new phone every few years. So because mobile doesn't grow, there's a mobile multiple in the revenues. However, our auto revenue, our PC revenue, our industrial revenue, our mixed reality and virtual reality revenue, all of those networking revenues, our markets are growing. The more that we diversify the company, the more we see a multiple expansion. That's the first part.

So that's why it's so important for Qualcomm to increase the percentage of revenues that are from growth markets because that's going to re-rate the company and change the company multiples. The second part of the question is a little bit more interesting. Look, there's this incredible growth of AI. And right now you see a lot of that happening in the data center, a lot of growth in the data center. But there's one thing, and we did talk about it in investor day, which is very

interesting happening. If you think about ChatTBT 3.5, and when it launched, it was incredible. I think everybody saw that. It responds like a human. It has all this data. One year later, Lama from Meta had the same quality of 3.5. But Lama, it was a few billion parameters, now hundreds of billions of parameters. You can run that on the phone. You can run that on a parameters, you can run that on the phone. You can run that on a PC. You can run that on the dashboard of your car.

So we are positioning ourselves to be the company that is going to run AI at the edge. When I hear that phrase, edge computing, this is what we're talking about now. PC, cars, everything that has a human connected to it. So explain to us, if you would, the importance of this. Because I think about, you know, before the internet was a thing, right? In the early 1990s, we had to have these powerful computers because we wanted to run the latest version of Windows. And then for a while, it didn't kind of matter because all the hard thinking happened somewhere on the internet.

It didn't happen on our local machine. And now all of a sudden, with AI, everyone's talking about edge computing. Suddenly our local machines need to be more powerful somehow for some reason. Why? What is that going to do for us? Look, I can talk to you about that all day, but I'm going to try to summarize a few examples. First of all, when you run AI, First of all, when you run AI, it's the edge. And let me define edge. Edge is your phone, is your glasses, is your earbuds, is your watch, is your PC, is your car, is an industrial equipment, a robot, everything that is not the cloud. And that's where our silicon is going.

We're now in every single market at the edge. When you run things at the edge, you have different use cases at the cloud. And the best way for me to describe that to you with AI is to give an example. So let's start with a car. So one of the use cases we're working with for many of our customers in the automotive industry. For example, you train a model

on all the service database of a car model. Do you have a car model? The maker of the car knows everything about the car from all the dealerships, all the service records. You train a model on that. So you're driving your car. A light come up. You ask the car to tell you this is what happened. This is what you need to do.

You can't drive. You cannot drive. You need to replace this part, and then I'll be able to schedule that for you. That's a different use case that happens at the edge. Now, let's talk about what Microsoft's doing. For example, they just announced a suite of features for the Copilot Plus running on Qualcomm Silicon. They have a feature which is called Recall.

The way Recall works, everything you do on your computer and you're working on your computer the machine is indexing everything so then you can just tell the machine um i remember seeing a powerpoint that had uh had the graph to talk about the qualcomm diversification revenue i'm going to say this is the document you saw. Or I saw a video on YouTube that taught me how to grow a beard. And they said, this is the video. I see you're doing quite well growing that beard, by the way. Go ahead.

I'm working on it. So those are things which are personalized as you. And it gets even more exciting when you think about phones, for example. Because also one of the least understood capabilities of AI. We think about AI as you go in, you do a search, or you have the know-all, do-all, I think, model. They will ask a question. But the reality is a little bit different. If you have an AI running on the device at the edge all the time, everything you, how you interact with the computer,

the computer now understands human language. So it changes how you fundamentally think about what an application is. Like a great example that I often provide is like a banking app. You have, we have this construct of apps in our head because of the 4G transition. But you could have an AI

that knows the credentials for your bank and you just ask, what's my balance? Here's your balance. What are the last five transactions? I took a photo of this bill. Can you pay this bill for me? Those are completely different

evolution of AI when you think of AI redefining applications and being part of the user interface. Are we in at some kind of inflection point here? What I mean is I have heard for many years about the internet of things and I can see the proliferation of chips all around me. Now you're talking about edge computing and the

chips need to be more powerful and smarter. When do we come to the point where investors are going to be more excited about this? And when you think long-term about Qualcomm and about your potential, how big of a company do you think this can be? I am convinced we have an inflection point right now. And we outlined that this Gen AI at the edge is an accelerator for all of our business, is an inflection point for smart glasses, because now you can wear glass that what you see the glass see what you hear the glass here and you have this ai wearable ai assistant with you all the time i believe phones are going to fundamentally change pcs are already changing

the car uh it's been a revolution i think for a digital in the car. And I think what's going to happen is Qualcomm is the company today that is running AI at the edge. We have developed technology, positioned ourselves, have been expanding into all of those markets. So we think as AI go to the edge, this is the company that has one of the biggest opportunities to benefit from. And one of the things we actually show in our investor day, we had some testimonials from Amazon, from Andy Jassy, testimony from Satya. And they both said, you actually create the AI on the cloud and it gets deployed not only the cloud, but also at the edge.

And I think that's the opportunity for Qualcomm. Thank you, Cristiano. Qualcomm has laid out some specific revenue goals for each of these new markets that it's growing into. For example, automotive, it wants to be over $4 billion by fiscal 2026. And then it wants to have that number double over the following three years to $8 billion. In what it calls Internet of Things, that includes PCs, factory robots, mixed reality headsets, earbuds, Wi-Fi boxes, and so on, it wants to go from $5.4 billion now to $14

billion by fiscal 2029. So those are specific targets, but we don't yet know, of course, what the actual growth rates will look like. Even the bulls on the stock aren't quite sure. Here's B of A securities analyst Tal Liani. He writes, Qualcomm needs to take share in these markets and these markets need to develop to support Qualcomm's long-term targets, of which the pace and magnitude is uncertain. But Liani nonetheless rates the stock at buy, and he has a price target of $245. That's more than 50% above where the stock traded recently.

So how do you come up with that figure? Well, he sees Qualcomm as worth 22 times his estimates for earnings for the year ahead. That's pretty close to a market multiple. He says that Qualcomm deserves a higher valuation than Intel his estimates for earnings for the year ahead. That's pretty close to a market multiple. He says that Qualcomm deserves a higher valuation than Intel because while both companies could benefit from more edge computing, Qualcomm is better positioned because of its power efficient arm based chip designs. Those are particularly well suited to edge computing.

But he says the stock doesn't quite deserve the multiples for companies that are closer to the AI data center, like Advanced Micro Devices and Broadcom and, of course, NVIDIA. You heard Cristiano say that he feels the company is at an inflection point right now. The stock dropped 6% after the investment day presentation, so at least some members of the audience are holding out for a little more proof. And that is Qualcomm. I want to thank Cristiano for stopping by and thank all of you for listening. Jackson Cantrell is our producer. Jackson, do you have any more fun facts about the cooler robots that you got there out in Los Angeles? Not really a fun fact, but I was looking for more information and it turns out people are

kicking them over and stealing the food. That sounds about right. You can subscribe to the podcast at Apple Podcasts, Spotify, wherever you listen. If you have a question you'd like answered on the podcast, just tape it on your phone. Use the voice memo app. You can send it to jack.how, that's H-O-U-G-H, at barons.com. That's it for this week. Hey, let's H-O-U-G-H, at barons.com. That's it for this week. Hey, let's not kick robots out there, all right?

These things are on the internet. They can remember, they can probably like scan your retinas. They probably know who you are. If this situation goes full Terminator eight years from now, you don't want to be that guy, all right? If you see a kicked cooler robot, help it back onto its feet or treads or wheels or whatever they are. I've noticed they've been putting googly eyes on them to, I don't know, make them be more empathetic.

It's only a matter of time before they start drawing glasses on them, though. See you next week.