Qualcomm (QCOM), a number one semiconductor firm, got here beneath stress on October 23 after Bloomberg reported that its long-term accomplice, Arm Holdings (ARM), was scrapping the license settlement between the 2 corporations. I imagine it’s time to be cautious about Qualcomm inventory as this resolution might adversely influence the corporate’s relationships with its principal prospects, doubtlessly resulting in a lack of income.
Though Qualcomm enjoys an extended runway to develop, aided by favorable long-term developments within the chip market, I’m impartial on the prospects for the corporate given the dearth of readability surrounding the influence of Arm’s resolution.
Though I imagine Qualcomm is well-positioned to learn from a restoration within the world semiconductor market, I’m cautious of the dangers posed by Arm’s license deal cancellation. Based on Bloomberg, Arm Holdings has given Qualcomm a 60-day discover of cancellation of the license deal that allowed the chipmaker to make use of Arm’s IP to design and develop chips.
If the 2 corporations fail to strike a brand new deal, Qualcomm would lose entry to Arm’s instruction set structure which is used to create customized CPU cores. Qualcomm makes use of Arm’s architectural infrastructure in designing chips for Android smartphones, which is the most important contributor to firm income.
As well as, Qualcomm might have to revamp recently-introduced Nuvia-based chip designs, resulting in a notable rise in growth prices. This, in flip, will influence Qualcomm’s working margins. Qualcomm can also must materially change its product growth pipeline, affecting the corporate’s product roadmap. Important delays must be anticipated for brand spanking new product launches, and these delays are more likely to damage the corporate’s model picture as a dependable chipmaker that delivers on time.
Along with the direct influence ensuing from the cancellation of Arm’s license deal, I’m anxious in regards to the selections Qualcomm is left with in a post-Arm period. One possibility can be to think about different chip design architectures comparable to RISC-V. The issue with this technique is that shifting to a brand new structure will price the corporate thousands and thousands of {dollars}.
Such a transition may even give rise to working inefficiencies within the first few years, making it troublesome for Qualcomm to maintain its main purchasers glad. Qualcomm can also contemplate creating a brand new structure in-house to mitigate the risk posed by Arm’s license deal cancellation, however the firm must incur substantial prices to construct a brand new platform.
No matter which path Qualcomm chooses, the corporate appears to be heading towards tough seas amid the rising competitors within the chip trade and the tendency of main tech corporations, comparable to Apple (AAPL), to develop chips in-house to cut back their reliance on third-party chipmakers.
Given the challenges mentioned earlier, Qualcomm might attempt to discover some center floor with its long-term accomplice, Arm Holdings, to settle the litigation points between the 2 corporations. The corporate might agree to finish this dispute by providing to pay greater royalty charges to Arm in alternate for utilizing the corporate’s structure. The 2 corporations can also contemplate putting a brand new deal that features new provisions for the usage of Arm’s chip design structure by Qualcomm for each cell and server markets.
Along with this, the 2 chip corporations might contemplate collaborating on new joint growth tasks with a clearly outlined income share. If all these methods fail, Qualcomm might resort to utilizing Arm’s normal chip design structure as an alternative of the customized structure that has given rise to authorized points since 2022.
Though my sentiment towards Qualcomm has been impacted by Arm’s license cancellation, I nonetheless imagine the corporate enjoys an extended development runway aided by favorable trade circumstances. Qualcomm is among the main gamers within the cell chiplet market, with a market share of 26.5% within the 5G smartphone chip market, solely behind MediaTek’s 29.2% market share. With world 5G adoption anticipated to increase within the subsequent few years, Qualcomm’s Snapdragon chips are more likely to stay in excessive demand, boosting income.
Qualcomm can also be increasing into new product classes, comparable to AI PCs, opening new doorways to develop. Based on Canalys, simply 19% of complete PCs shipped in 2024 might be AI PCs, however AI PC penetration is anticipated to achieve 60% by 2027, highlighting the robust development potential of this market phase. As one of many main chipmakers for AI PCs, Qualcomm is well-positioned to learn from this favorable growth.
Furthermore, Qualcomm’s automotive enterprise is gaining traction, serving to the corporate diversify its income streams. In Fiscal 2023, automotive income grew 24% year-over-year to $1.9 billion, aided by the elevated spending of automakers on superior applied sciences comparable to high-quality infotainment methods and autonomous driving. As of 2022, Qualcomm was the main chip provider to the automotive trade with an 80% market share, which highlights the corporate’s robust footing on this fast-growing sector.
Regardless of the expansion runway forward of Qualcomm, some analysts have turned cautious in regards to the firm’s prospects in the previous couple of weeks. As an example, JPMorgan analysts added Qualcomm to its adverse catalyst watchlist earlier this week as they anticipate the corporate to subject weak steering for the upcoming quarter. On October 21, Barclays additionally claimed that Qualcomm is lagging a few of its chipmaker friends when it comes to AI progress.
Nonetheless, based mostly on the rankings of 21 Wall Avenue analysts, the common Qualcomm value goal is $214.13, which means an upside potential of 25.1% from the present market value.
At a ahead P/E of 17 in comparison with 50 for Nvidia (NVDA) and 45 for Superior Micro Gadgets (AMD), QCOM appears cheaply valued. Nevertheless, Qualcomm’s reliance on Arm’s chip design structure paints a bleak outlook for the corporate, as failure to renegotiate deal phrases might result in a cancellation of the partnership. Regardless of being attractively valued, QCOM inventory might battle within the absence of answer to mitigate the risk posed by Arm. For that reason, I’m impartial on QCOM right now.
Arm Holdings’ potential cancellation of a chip structure cope with Qualcomm is more likely to restrict the near-term development potential of the latter. Qualcomm’s different choices additionally counsel the corporate’s working margins might come beneath stress within the subsequent few quarters. Regardless of the lengthy development runway loved by Qualcomm, I imagine buyers ought to tread fastidiously given the uncertainty surrounding the prospects for Qualcomm’s cell chiplet enterprise.