QCOM Ups AI Data Center Bet with AMZN Partnership

George Tsilis (0:04)

All right, thanks, and welcome back to the Tech Corner this week. I'm George Tsilis, Senior Markets Contributor here with the Schwab Network. On this week's edition, we're going to be revisiting Qualcomm. Now, Qualcomm is a global semiconductor of wireless technology and increasingly becoming an AI computing infrastructure company. Historically, Qualcomm has best been known for supplying Snapdragon processors, cellular modems to companies like Apple, radio frequency technologies, and wireless connectivity for smartphones. The company is actively trying to transform itself from a handset-centered semiconductor company into a broader computing platform, spending all kinds of devices including smartphones and personal AI devices, automotive, industrial and consumer IoT devices, robotics, PCs, edge artificial intelligence, and now AI data centers as well. Now, Qualcomm operates to two main segments. It's CDMA technology segment, also known as QCT, as well as its technology licensing division, known as QTL. Now under the QCT umbrella, this is where the company develops and sells semiconductor platforms. Its largest businesses are still handsets, automotive, and IoT devices, but Qualcomm is now building out a significant data center product portfolio. Now under the QTL division, this is where the company's technology licensing monetization comes in. It has an enormous patent portfolio, including intellectual property essential to 5G wireless standards. QTL also remains particularly important because licensing economics produce exceptionally high margins. Now let's look at the competitive landscape. First off, Qualcomm faces competition from major companies in the semiconductor industry space. Starting off, these companies include Marvell and Broadcom. These two companies compete in silicon and high-speed data center connectivity with Qualcomm. Arm Holdings is another technology architecture and IP supplier.

NVIDIA is also a major competitor in the automotive segments. And Intel and AMD compete in PCs as well as data center CPUs. Now, when it comes to unique value, Qualcomm's core technological advantage remains high performance and low power consumption. Now this capability has developed through decades of designing chips, like the Snapdragon processors, for battery-powered smartphones where compute performance, artificial intelligence, connectivity, thermal management and energy consumption all have to be optimized simultaneously. Qualcomm increasing believes that these same innovations have become extremely valuable for AI inference. Qualcomm wants to bring the architecture that made Snapdragon successful mobile devices into AI PCs, vehicles, robotics, industrial equipment, and eventually large-scale AI data centers.

Now, let's take a look at some recent news for Qualcomm. First off, let's go back to the recent earnings on July 29 Fiscal Q3 revenue came in around 9.95 billion versus 10.37 billion a year earlier. This represented a 4.4% decline year over year. But nonetheless, revenue did come in ahead of estimates, which were expected to be around 9.7 billion dollars.

Now, also importantly, if you look at earnings, non-GAAP earnings were $2.21, which is actually a representative of a 20% decline compared to last year, but nonetheless, only missed the estimates by about 2 cents, which was $2.23.

Now, if you actually peel this open and look closely, we can see that the handset revenue, its QCT division, declined dramatically. They posted in this division $5.09 billion, down 20% year over year from $6.33 billion last year. Now, management attributed much of this decline to lower chipset shipments as several major OEMs adjusted production plans because of memory supply constraints and higher component pricing. This is extremely important because handsets still represent approximately 60% of the QCT division revenue for the quarter.

On the other hand, automotive has become one of Qualcomm's strongest businesses.

Fiscal Q3 automotive revenue reached $1.59 billion, up an extraordinary 61% year over year from $984 million the previous year. This also marked Qualcomm's 23 consecutive quarterly double digit automotive revenue growth. Management also acknowledged broad increases in semiconductor input costs, including wafer fabrication, advanced packaging, assembly, testing, as well as memory. Now, in response to that, Qualcomm did denote that they are raising prices, but those increases take time to flow through the financial statements. Now, even recently, this week, on September 8th, Qualcomm announced a multi-generational collaboration with Amazon focused on AI data center infrastructure. The two companies will work together on customized silicon for AI inference and high-performance optical connectivity for Amazon's data centers. Now, for Qualcomm, this provides arguably the strongest validation yet that its data center push is moving into real hyperscale deployments.

Now, let's also take a look at some other positive attributes for Qualcomm.

Now, despite, like I said, the handset challenges, automotive revenue surged 61% year-over-year. Now, that's meaningful because they're competing aggressively with Nvidia.

Qualcomm's diversification strategy is materializing. With aggressive expansion of data centers, automotive and AI segments, expected to drive non-handset revenue to $40 billion and earnings above $18 a share by fiscal year 2029 Also, Qualcomm's low-power architecture could become particularly valuable as hyperscalers focus on increasingly energy costs and tokens per watt. Lastly, some other recent successes include multi-year partnerships and significant design wins in automotive. For example, partnerships with BMW and Stellantis, as well as developments and partnerships with other data center deals, including Meta and Microsoft. Now, these new deals also project strong non-handset growth and reinforces the company's AI leadership aspirations. Now, despite many of these other positives and mention, there are always some concerns we have to address. First off, Qualcomm is losing Apple's moment in business over time.