Key Points
Qualcomm and Apple have extended their deal to develop 5G modems together.
Qualcomm’s earnings have been impacted by the global decline in smartphone sales.
Analysts predict a 10% growth in Qualcomm’s earnings in the coming year.
5 stocks we like better than QUALCOMM
Chipmaker Qualcomm Inc. NASDAQ: QCOM saw an increase in its stock price after signing a five-year agreement with Apple Inc. NASDAQ: AAPL to produce 5G modems.
Apple has been a long-standing customer of Qualcomm and it is estimated that about 20% of Qualcomm’s revenue comes from Apple.
While Qualcomm already produces 5G modems for iPhones, Apple has been working on its own version of the technology since acquiring Intel Inc.’s NASDAQ: INTC smartphone modem business in 2019.
However, developing its own modems has proved to be challenging for Apple due to the complex architecture of Qualcomm’s chips.
The recently released Apple iPhone 15, launched on September 12, incorporates Qualcomm modems as expected.
Partners with a History of Legal Battles
Qualcomm and Apple have a complicated relationship, often described as “frenemies.” They have extended their 5G modem partnership but also have a history of legal disputes.
In 2019, the two companies settled an out-of-court dispute over billions of dollars in licensing fees and royalties for modem chips. Prior to the settlement, Apple had shifted away from using Qualcomm chips and started using Intel’s. As part of the settlement, Apple returned to using Qualcomm chips and agreed to a six-year royalty agreement. The new agreement covers smartphones released between 2024 and 2026, with a possible extension until 2028. However, Qualcomm officials have stated that they expect to provide only 20% of the modems for Apple’s 2026 iPhone launch, suggesting a gradual decline in Apple’s business with Qualcomm.
Risks of Declining Business with Apple and Samsung
In its 2022 annual report, Qualcomm highlighted the significance of Apple and Samsung Electronics Co. Ltd. OTCMKTS: SSNLF as its major customers. A decline in business from these key purchasers poses a risk for Qualcomm.
The same report mentioned Apple’s acquisition of Intel’s modem business and anticipated that Apple would use its own modem products in future devices instead of Qualcomm’s products.
According to MarketBeat’s Qualcomm analyst ratings, the consensus view is a “moderate buy,” with a price target of $141.96, indicating a potential upside of 25.47%.
Qualcomm’s earnings and revenue have declined in the past three quarters. Analysts estimate full-year earnings to be $6.68 per share, reflecting a significant year-over-year decline of 47%.
Global Decline in Smartphone Sales
The primary reason for Qualcomm’s recent struggles is the global decline in smartphone sales. A report by research firm Counterpoint revealed a 9% year-over-year decline in the global smartphone market.
The decline in Chinese consumers’ smartphone purchases has played a significant role in this trend, but sales in the U.S. have also been sluggish compared to previous years.
However, analysts expect the smartphone market to stabilize, leading to a projected earnings growth of 10% next year, with earnings reaching $7.35 per share.
In its latest quarterly report, Qualcomm surpassed analysts’ earnings expectations but fell short on the revenue side, as shown in MarketBeat’s Qualcomm earnings data.
Qualcomm’s Performance and Dividend
The performance of Qualcomm’s stock has struggled to gain momentum since early 2022, although there have been some short-term rallies.
Compared to other chip designers in the industry, Qualcomm’s stock performance has lagged behind, but it competes against AI giants like Nvidia Corp. NASDAQ: NVDA and Broadcom Inc. NASDAQ: AVGO.
Despite its relatively modest year-to-date gain of 2.91%, Qualcomm stands out in the tech sector due to its dividend. MarketBeat’s Qualcomm dividend data shows a yield of 2.83% and a track record of increasing shareholder payouts over 21 years. This provides an incentive for investors as they await potential improvements in the stock’s performance.
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