This stock could better connect with consumers amid a coming smartphone upgrade cycle.
Perhaps no stock has prospered more from artificial intelligence (AI) than Nvidia. The semiconductor company leading in the development of AI chips brought triple-digit revenue and earnings growth, and at one point, the stock was up 1,000% from its late 2022 low.
Although Nvidia will likely dominate the AI chip space for the foreseeable future, investors appear to have had second thoughts on Nvidia stock as a high valuation, and rising competition has led investors to question how much more that stock can grow in the near term. Hence, investors are looking elsewhere, and they might do well to shift their focus to Qualcomm (QCOM -2.88%).
Why Qualcomm
Amid the focus on AI servers, investors may have overlooked the importance of smartphones in utilizing the technology. Since most users have a smartphone nearby, it will probably serve as the most heavily utilized AI interface. Moreover, with the 5G upgrade cycle having run its course, investors seem to have lost some interest in Qualcomm stock.
Fortunately, Qualcomm has worked to inspire its next upgrade cycle in the AI field. Qualcomm developed its AI-capable Snapdragon 8 Gen 3 chip, allowing Apple to release its first AI-ready iPhone.
Allied Market Research estimates the compound annual growth rate (CAGR) of the AI chip market at 38% through 2032. Before the 5G upgrade cycle ran its course, revenue in fiscal 2022 grew 39% yearly before falling by 19% the following year. Assuming the industry has begun a revenue upgrade cycle, such growth could return.
Additionally, Qualcomm stays on top by continuing to patent improving technology in smartphone chipsets. Thanks to this approach, even top companies like Apple have not been able to take its market lead. Despite telegraphing an intent to move on from Qualcomm, Apple has now extended its patent license agreement to March 2027, an indication of Qualcomm’s indispensability.
Furthermore, should consumer tastes change, Qualcomm does not rely on smartphones to drive its future. To that end, it pivoted into the Internet of Things and automotive beginning a few years ago. These two sectors made up 27% of Qualcomm’s revenue in the third quarter of fiscal 2024 (ended June 23). With the automotive growing revenue by 87%, Qualcomm seems to have an additional high-growth business.
How Qualcomm fares overall
Signs have begun to appear that another upgrade cycle is underway. Qualcomm’s $29 billion in revenue reported for the first nine months of fiscal 2024 rose by less than 6% compared to year-ago levels. Still, if including fiscal Q3 only, the growth rate increases to 11%.
Also, Qualcomm slowed the rate of expense growth to 2%. Moreover, the company reported $768 million in investment income. That helped its net income for the first three quarters of 2024 grow to more than $7.2 billion, a 26% yearly increase.
The good news is that even after a significant decline this spring in an industry sell-off, Qualcomm stock is up nearly 55% over the last year.
Despite those gains, its P/E ratio stands at just 22. This gives Qualcomm a lower earnings multiple among the largest semiconductor companies. As the company’s revenue growth ramps up again, this earnings multiple will likely look increasingly appealing.
Investing in Qualcomm stock
Amid Nvidia’s stock price moving far ahead of its growth, other semiconductor stocks in AI begin to stand out, and one well-positioned for growth is likely Qualcomm.
Qualcomm has long innovated in the smartphone chipset space, and thanks to its integration of AI, the market is likely entering a new upgrade cycle that should bolster Qualcomm for several quarters to come. Its continuous innovation also applies to its other businesses, particularly automotive, which are becoming new growth drivers for the company.
Finally, its 22 P/E ratio is very low considering this approaching growth. That should bolster Qualcomm stock as customers and investors alike capitalize on the move to AI-enabled smartphones.
Will Healy has positions in Qualcomm. The Motley Fool has positions in and recommends Apple, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.
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