Barron's Streetwise - Qualcomm CEO Sees Growth Beyond Apple

Episode Date: November 20, 2021

Cristiano Amon talks about selling chips for more than just iPhones, including cars, factories and smart glasses. 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. After our last earnings call, investors finally understood that this company can no longer be defined by a single end market, which is mobile, and a single customer relationship that is Apple. They also understood that diversification strategy is working, and there's truly demand and growth for Qualcomm outside the mobile space. I'm hoping when we have our investor day and we talk about our

vision and strategy, the investors will get the full picture. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard is Cristiano Amon, the new CEO of chipmaker Qualcomm. And I spoke with him ahead of the company's Investor Day presentation this past week. And I wrote a bit about that in Barron's magazine. Cristiano's message for investors seems to be resonating. After the Investor Day, the stock jumped 8% and that's on top of a 13% rise earlier in the month after Qualcomm reported quarterly financial results. In a moment, we'll hear more from Cristiano about what's behind this burst of enthusiasm for Qualcomm shares, and a Wall Street analyst will weigh in on Qualcomm and other chip stocks.

this is a moment of tremendous upheaval in chips and i'm not talking about traditional boom and bus cycles those have actually smoothed out a bit over the years because chip sales used to get bunched up around microsoft windows releases which drove computer sales. But today, chips have proliferated across smartphones and cars and home appliances and more, so sales get spread out more evenly than they used to. I'm also not talking about supply chain problems and chip shortages in some parts of the industry, although that remains a concern. I'm talking about sweeping changes in chip making leadership. I'm talking about sweeping changes in chip making leadership. If you were asked to name the biggest U.S. chip company, you might say Intel. And based on sales, you'd be right. But did you know that NVIDIA is now three times the size of Intel, approaching four times based on stock market value?

Last year, we had NVIDIA founder and CEO Jensen Wong on this podcast, and we talked about how the company's heritage in highly parallel processors for video games left it well positioned for the advanced computing needed for artificial intelligence applications and data centers, next generation cars, and more. NVIDIA stock is up 220% since that episode. There are five U.S. companies now with stock market values above a trillion dollars. Microsoft, Apple, Alphabet, Amazon, and Tesla. Facebook, which recently changed its name to Meta Platforms, is close. And the next largest company is now NVIDIA,

valued at more than three quarters of a trillion dollars. Now, we also spoke with Intel's CEO on this podcast back in July. In that episode, we covered how Intel had lost its technology edge to a company called Advanced Micro Devices, or AMD, and how it has a plan to retake the lead, but if the plan works, it'll take two or three years.

And there's a risk of market share loss between now and then. Since that episode, Intel stock has lost 5% and AMD has gained 42%. By the way, we also talked about how one manufacturing technology separating chip winners from laggards right now is called Extreme Ultraviolet Lithography, and a Dutch company called ASML sells machines for that, putting it in a pivotal position. Its US-traded shares are up 12% since that Intel episode. You might also have heard that Apple recently started making its own Mac computer chips, replacing Intel. It seems to me like this is the biggest technological shift that I can recall from Apple. 3.5x times faster CPU, five times faster graphics performance. That's important, and we'll come back to it in a bit. Right now, let's try to

figure out where all of this leaves Qualcomm. Qualcomm was founded in 1985, back when tech companies didn't give themselves cutesy names like Poodle or Noodle or Abracadoodle. They gave themselves uninventive names that told you what they did. So Qualcomm is short for Quality Communications. The company briefly made chunky cell phones in the 1990s, but where it has had much more success is in developing and patenting wireless standards, including something called Code Division Multiple Access, or CDMA. And that takes us to the most beautiful woman in the world. Hedy Lamarr was born in Austria during World War I, and in 1933 starred, Jackson, you should

cover your ears for this part, in a Czech movie called Ecstasy, which featured nudity, which at the time wasn't done in cinema. Hedy dropped out of film, married an Austrian arms dealer, paid attention during his business meetings, then left him and made her way to Hollywood, where she became a star and won mixed reviews for her acting, but universal acclaim for her looks. What was that for? For leaving me alone, penniless, standing in the rain, and I know you'll do it again. In 1940, Hedy met a composer who had patented a machine that could transcribe piano notes on a roll of paper as they were played, and he helped her patent an idea she had for a radio-guided torpedo that couldn't be jammed

because it hopped quickly from frequency to frequency. The transmitter and receiver would know which frequencies to switch to because they'd be recorded ahead of time on tapes, kind of like the rolls of paper used in player pianos. Does it sound like I'm making this story up? Because I'm not. This was during World War II, and Hedy offered the technology to the U.S. military, which declined, and suggested that she sell war bonds instead, which she did a lot of them.

Anyhow, it turns out that Hedy's frequency-hopping technology became the basis for Wi-Fi and cell phones. Long after Hedy's patent had expired, Qualcomm founder Erwin Jacobs decided that a similar technology was just what the budding field of cellular telecommunications needed. So he developed CDMA to go up against the more established TDMA technology of the day, and Qualcomm won, and that secured its place as a key maker of communications chips for phones for decades. If you invested in Qualcomm in 1991 at the time of its initial public offering, you've made 23% a year, more than double the annual return of the S&P 500. a year, more than double the annual return of the S&P 500.

In 2018, a chip conglomerate called Broadcom tried to buy Qualcomm, but it dropped its bid after Qualcomm resisted and pushback from regulators made the deal seem unlikely to get done. Apple and Qualcomm had a big legal battle over patents, but they reached a settlement in 2019 because Intel dropped out of the wireless chips business, leaving Apple with no good other choices. The settlement involved billions of dollars paid to Qualcomm and a six-year deal to supply chips to Apple. Now there's just one problem. Remember I said that Apple is now making the main chips for its Mac computers? Well, it turns out it's pretty darn good at it. The chips combine lots of different functions into a single architecture and are fast without using a lot of power, which keeps heat down and battery life for laptops up.

And that has Wall Street thinking, if Apple is so good at making those chips, why couldn't it just make its own wireless chips once the supply deal with Qualcomm runs out? And if it did that, Qualcomm would lose a big chunk of its revenue. And that has kept some investors cautious on Qualcomm's stock. But as I said, they seem to be coming around to the stock now. To learn more about what Qualcomm has planned, I reached out to the man in charge. That's next after this short break. Like me and think a TFSA stands for Total Fund Savings Adventure? Maybe reach out to TD Direct Investing. Welcome back. Time to hear from Qualcomm.

Hello, how are you? Very good. Good to see you. That's Cristiano Amon. He's been working for qualcomm for 26 years and this past summer he was appointed ceo i started with a question about the cell phone business and 5g i have a 5g phone and it's plenty fast but my life feels a lot like it did back when i had one fewer Gs. So what's the big deal about 5G? When we set ourselves to design 5G, the goal was about connecting everything to the cloud 100% of the time in a reliable manner. It's the first time they have a general purpose technology

from the telecommunications sector that's going to be basically adopted in every other industry, like electricity. So with electricity, I'm sure in the very beginning, there will be a conversation about what the use case was. Well, maybe we can have a lamp, we can have a motor. Now you don't talk about it, you just assume it's going to be there, and then you're going to use it. That's how we think about connectivity to the internet. Cristiano says that with 5G, the use cases are likely to follow the technology. Now that you have all that bandwidth, you're starting to see the evolution of some of the services. For example, gaming, which you have to have a gaming computer or a console.

Gaming is becoming streaming. Netflix is talking about streaming games. Xbox, cloud, talking about streaming games, Xbox cloud talking about streaming games. So mainstream games are coming to every stream, every single screen streaming with 5G. And then the next question is what's the future of your phone? And we at Qualcomm know you're somewhat limited by the screen size. And we have been investing for at least a decade in the fundamental technologies for you to do mixed reality or connect physical and digital spaces. Now people say the metaverse and they understand it. Most likely 5G will create glasses as a companion to your phone,

as part of your everyday computing platform that you carry with you. as part of your everyday computing platform that you carry with you. I asked Cristiano, what keeps Qualcomm safe from competition? He says it has the largest research and development spending of any company devoted to wireless communications. But he also talked about Qualcomm's plans to move well beyond phones. We have been growing into automotive. We've been growing into the broader internet of things, consumer, enterprise, networking. And as a result, just on the last earnings call,

38% of our chip revenues is non-handsets. And I think the company has now incredible growth opportunities across a broad array of industries. Let's take a closer look at a couple of those industries, starting with cars. Here's Cristiano. Automotive is one of the fastest growing new business for Qualcomm. And that's natural because the car itself and this entire industry has been transformed. The car companies are becoming tech companies. Just look at market cap of a company like Tesla compared with the rest of the industry. And you have technology coming to the car,

electrification coming to the car. The car is becoming an innovation platform. And you look at the traditional car companies, we're working now with 23 of the global 26 brands. And they look at Qualcomm as a company that can provide them technology and make them go to that transition. Cristiano says Qualcomm has an opportunity in personal computers too.

Apple's in-house chips for Macs use something common to the phone world called ARM-based system-on-chip designs. Because part of the technology comes from a company called ARM, and the work that used to be done by an entire system of components is done by one chip. Qualcomm is developing its own ARM-based system-on-chip design with the goal of using Apple's approach, but on non-Apple computers. If it succeeds, that could be a big source of new revenue. By the way, NVIDIA is in the process of trying to buy ARM, and regulatory approval is coming down to the wire. Success is by no means assured. Now, another source of new revenue for Qualcomm is smart factories.

Here's Cristiano. The name of the game of manufacturing, for example, just speak on this sector. Manufacture in the 90s, you build the biggest possible factory you can in Asia. You're going to have the lowest conversion cost and you're going to win with scale. Now it's different. Now you can connect the manufacturing equipment to the cloud. You can distribute your manufacturing. You have smaller factories.

You can have multiple products in the same factory with short cycle times. And you can have data and artificial intelligence as tools to increase productivity. Qualcomm is the company on the other side, connecting those things to the cloud. Apple was recently 20% of Qualcomm's revenues. At its recent investor day, Qualcomm projected that Apple will contribute only a low single-digit percentage of revenues by the end of its fiscal 2024, and that non-phone revenue by then will grow by billions of dollars. That has investors viewing the company as less risky than they thought, and maybe with some potential for an upside surprise.

risky than they thought, and maybe with some potential for an upside surprise. Well, what Qualcomm did when they provided their financial plan is gave you numbers into fiscal 24 that pretty much exclude Apple. The Apple risk is now low and in fact now presents upside to the fiscal 24 plan because you still don't know for sure whether they will get designed out fully. That's Chris Casso, who covers Qualcomm for Raymond James. He says Qualcomm's plans for growth outside of phones appears feasible. I think what they did a good job of is showing that there's a lot of irons in the fire there. There's a lot of different areas which could be impactful. And as I pointed out, like something like the Oculus headset, my son has one, it's

fantastic. It needs a lot more software for it, but it's a really great device. And the silicon content in there is equivalent to a smartphone. So if that category should grow, that just gets added to the existing smartphone market. By the way, investors sometimes get confused by chip terminology because the industry uses many different terms to mean the same thing. And it also uses some terms to mean many different things. Chips, semiconductors, integrated circuits, processors, microprocessors, and silicon, those are often used interchangeably. Technically, a semiconductor is a material that's not quite a conductor of electricity and not quite an insulator.

An element called silicon is by far the most widely used semiconductor, not because it's the best one, but because it's pretty good and widely available. Silicon is the eighth most common substance on Earth. You can find it bound up with oxygen in a material called silica, more commonly known as sand. But when Chris talks about the silicon inside the Oculus virtual reality headset, he doesn't mean the element, he just means the dollar value of the chips that Qualcomm can sell for those headsets. value of the chips that Qualcomm can sell for those headsets. On the other hand, if someone talks about the chip industry, they could mean companies that make memory or displays for televisions or solar panels or analog chips, which serve as go-betweens for the physical and digital

world like temperature sensors. Some companies make commodity chips for things like remote controls and others leading edge chips for, let's say, data centers. Some make chips for processing computer graphics. There are companies that make equipment for making chips or for testing them. And of course, Qualcomm makes communications chips, but it also wants to play a bigger role in central processors. So the lines are becoming more blurred. Now, Chris is bullish on Qualcomm for the reasons we've already mentioned, plus one more. You're going to hear him use the term CAGR here. That's an acronym for Compound Annual Growth Rate. Last thing on Qualcomm that we didn't mention is just actually the handset growth itself is pretty good.

They're expecting a 12% revenue CAGR in handsets over the next couple of years. And that's not necessarily because the handset unit market's growing. Everyone has a smartphone. But the two things that are happening there is you have the migration from 4G to 5G. That's already happened here in the US and in China, but the rest of the world still has to have that migration. And the very important development also is that Huawei, the big Chinese smartphone manufacturer, has gone away because of trade sanctions. And Huawei used to do all their own chips. And so that share from Huawei is moving to other OEMs. People in China, Xiaomi, Oppo, Vivo, and Samsung. And Qualcomm supplies those vendors. Chris says the dollar value of Qualcomm's content on 5G phones is around 50% higher than that for 4G phones. It's also pushing

into radio frequency filter technology, which is important to 5G phones. Broadcom is a player there. Several companies called Skyworks Solutions and Corvo. In addition, I like in Qualcomm, Chris is also bullish on NVIDIA, AMD, and a smaller company called Monolithic Power Systems, which is fast growing and focused on power management. He's bearish on Intel. Okay, back to Cristiano. I asked about his supply chain. He says Qualcomm is still constrained, but that it's doing better than others. The company's recent growth numbers seem to reflect that. Cristiano says he thinks Qualcomm is in the very first inning of the 5G transformation. He says soon, workers will be able to use ordinary consumer laptops to do demanding work, like computer-aided design and professional video editing, from anywhere using the cloud and 5G.

He says if you believe in the cloud-based economy, then you've got to believe in what Qualcomm is doing. Let's end on smart glasses. I asked Cristiano, are we all going to be using these by 2030? And he said, it's possible. And I asked, what are we going to do with them? I can walk into this room right now. I can see you immediately with cameras and the glasses. I can get a capture of your face, goes to the cloud, quickly compare LinkedIn on Facebook

and Instagram and say, this is Jack. Jack is connected with XYZ. You met Jack before. This is all the things that you guys have in common. I can look at an object. I don't know what it is. I can search it. I can get information on it. Now, think about some other examples beyond social, education, training, the ability to do true telepresence. The glasses in the future will be able with sensors in the glasses, understand your facial expression, can render you yourself somewhere else, and it can project to you another person. So you'll be able to have an experience of meeting somebody with a fully immersive telepresence experience. And that's how we're going to think about the evolution of your phone calls.

Thank you, Cristiano and Chris. And thank you everyone for listening. Jackson, you don't still have your ears covered, do you? No, but I got the Oculus on. I'm playing golf right now. Multitasking. Nice. Jackson Cantrell is our producer.

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