Qualcomm’s stock rises as new generative AI capabilities boost premium smartphone sales

Smartphone chipmaker Qualcomm Inc. said sales of artificial intelligence-enabled smartphones boosted its sales as it delivered better-than-expected financial results today, and it also expects a similar performance in the coming quarter. Its stock was ticking up slightly in after-hours trading in a sign that investors welcomed the news.

The company reported second quarter net income of $2.33 billion, up from a profit of just 41.7 billion in the same period last year. Earnings before certain costs such as stock compensation came to $2.44, up from $2.15 one year earlier and above the analysts’ consensus estimate of $2.33 per share.

As for revenue, this crept up by 1% from a year earlier to $9.39 billion, beating Wall Street’s forecast of $9.35 billion.

Qualcomm President and Chief Executive Officer Cristiano Amon (pictured) said the company was pleased with the results and excited by its ongoing growth and diversification. He noted that the company delivered a “third consecutive quarter of record QCT automotive revenue” and told investors he was excited about the “upcoming launches of our Snapdragon X platforms, enabling leading on-device AI capabilities.”

Qualcomm is regarded as the world’s biggest supplier of chips for smartphones and counts both Apple Inc. and Samsung Electronics Co. Ltd. as major customers. The company was hit by declining sales last year, as consumer sentiment dipped following the COVID-19 pandemic-era sales boom. The downturn impacted the Android smartphone market hard, which is where most of the company’s business comes from.

Fortunately, the smartphone market appears to be recovering, for the company provided an upbeat forecast for the third quarter, saying it anticipates sales of $9.2 billion at the midpoint, and earnings of $2.55 per share. In contrast, Wall Street analysts are looking for revenue of just $9.05 billion and earnings of $2.17 per share.

Qualcomm’s stock was up more than 4% in extended trading, having closed the regular trading session at $164.11, up 13% for the year.

It’s not all bright for Qualcomm, as the company faces increased pressure from rivals in the Android chip market, such as China’s Huawei Technologies Co. Ltd., which last year introduced a domestically-made smartphone chip. Another emerging rival is the Taiwanese firm MediaTek Inc., which said last week it expects to make significant gains in market share in premium Android handsets.

To counter these threats, Amon has been trying to diversify Qualcomm’s businesses to reduce its reliance on smartphone sales, with new chip products for personal computers, vehicles and wearable devices. But the vast majority of its revenue still comes from smartphones, with China being one of its most important markets.

The company’s main business segment, QCT, which covers handset, automotive and Internet of Things chip sales, delivered $8.03 billion in revenue during the quarter, up 1% from a year earlier. IoT revenue fell 11% to $1.24 billion, while automotive sales increased 35% to $603 million.

China was a bright spot for the company, with sales there increasing by an impressive 40%, reflecting what officials said is its “strong competitive positioning and recovery of demand.”

Amon told analysts on a conference call that the company’s major customers in China, including Xiaomi Corp., Vivo Communication Technology Co. Ltd. and Oppo Mobile Telecommunications Corp. Ltd., are all driving high demand for smartphones. None of them are losing market share to a resurgent Huawei, he added, with that company’s re-entry into the smartphone market simply helping to stoke more interest in Android phones, which are often powered by Android chips.

Huawei has previously been slapped with U.S. sanctions, preventing it from buying Qualcomm’s most advanced processors, and the company was forced to drop out of the premium handset segment as a result. However, with the launch of its homegrown processor, it is now re-emerging as a key player in the high-end smartphone market, providing a challenge to Qualcomm.

But Amon insisted that “we have not seen signs of weakness in the Android premium market in China.”

Amon told analysts that Huawei is still a customer, but the company only supplies it with older, less-advanced 4G smartphone chips, and as those components go out of date, it’s likely that it will stop doing any significant business with it by next year.

Apple and Samsung are also major customers, supplying markets globally, but the former is less reliant on Qualcomm now than in the past. While Apple still relies on Qualcomm for its connectivity chips, it now builds its main processors itself.

Qualcomm has responded to that by diversifying its business, and this year announced a new chip intended to power bigger devices, including Microsoft Corp.’s new Surface Pro laptops and tablets. Those devices are expected to start selling in the current quarter, but Amon said they won’t have a significant immediate impact on the company’s revenue.

Besides selling chips, Qualcomm earns a significant amount of revenue through its QTL business, which sells licenses for key patented networking technologies used by almost every mobile device in the world. Device makers generally have to license these technologies even if they don’t use Qualcomm’s chips, as the company’s patents are essential for providing internet connectivity.

As such, the QTL business delivers a steady, if somewhat predictable income stream for the company. In the latest quarter, it reported revenue of $1.32 billion, up 2% from the same period last year.

Photo: Qualcomm