Qualcomm

Qualcomm reported fiscal third-quarter revenue of $9.95 billion, down 4% year over year but toward the high end of guidance. Qualcomm expects September-quarter revenue of $10.1 billion, down 10% year over year but in line with FactSet consensus estimates.

Why it matters: Qualcomm remains optimistic about its data center chip opportunities, while its automotive business continues its rapid growth. However, Qualcomm's upcoming chip share loss with Apple will be greater than anticipated, while sales into Android will suffer due to high memory prices. Handset chip revenue is expected to be down about 25% year over year, thanks to both Apple headwinds and ongoing weak Android revenue. Qualcomm expects a 50% sequential decline in Apple revenue in the December quarter as it will sell modems into fewer iPhone 18s. An Android rebound and nonhandset chip growth should offset the Apple share losses in the medium term, making Qualcomm less reliant on the smartphone market in general. However, even more of Qualcomm's fate hinges upon its nascent data center chip business.

The bottom line: We cut our fair value estimate for narrow-moat Qualcomm to $170 per share from $200 due to weaker near-term and long-term handset revenue than our prior forecast. Shares fell as much as 8% after hours, likely due to the Apple revelation. Shares appear undervalued, but we admit that the market disconnect hinges on Qualcomm's artificial intelligence business. We anticipate even further upside beyond our fair value estimate if Qualcomm can deliver on its recent forecasts, such as $18 in adjusted EPS in fiscal 2029. We suspect the market might make Qualcomm prove itself in AI before it gives the company full credit for its diversification efforts.

By end market, we're impressed that Qualcomm expects another quarter of 60%-plus year-over-year growth in automotive chip sales. Qualcomm expects Internet of Things revenue to be flat year over year, with good growth in industrial and networking products, offset by weakness in consumer devices due to the same memory chip crunch that is providing headwinds to the smartphone market.

Qualcomm hinted that it expects sequential growth in the December quarter. The firm will face a 50% sequential decline in Apple chip revenue, but foresees a rebound in Android revenue as smartphone customers burned through their processor inventory in prior quarters. Data center revenue should start to ramp in the December quarter, while automotive should continue to grow well.

Qualcomm also suggested that its fiscal first quarter in December will no longer be its seasonally strongest one. This was the case in years past when it had high Apple chip exposure. Now, Qualcomm thinks it can lift revenue sequentially again in the March 2027 quarter. While encouraging, these comments suggest to us that much of the $5 billion in data center revenue that Qualcomm expects in fiscal 2027 will be back-end loaded.

We think Qualcomm's profitability forecasts imply a reduction in gross margin, and the company is facing higher input costs, like many other chipmaking peers. Qualcomm is likely to raise prices in the quarters ahead to offset the input costs, while also taking other internal cost actions, and these factors should be reflected in gross margins later in fiscal 2027.

Our fair value estimate is $170 per share, which implies a fiscal 2026 price/adjusted earnings ratio of 16 times and a 7% free cash flow yield.

We model a 3% revenue decline in fiscal 2026, as modest modem share loss at Apple and reduced Android-based smartphone production will offset Qualcomm’s outstanding growth in its automotive chip segment.

We model 5% revenue growth in fiscal 2027, down from our prior forecast of 14% growth. We expect Qualcomm to begin earning data center AI processor revenue (which the company forecasts to be $5 billion) to offset its accelerating share loss at Apple. In fiscal 2027, Qualcomm previously expected its modem share within Apple's iPhone 18 series to be only 20%, which would have brought Qualcomm’s chip revenue with Apple down to about $2 billion versus $6 billion-$7 billion in years past. Qualcomm has since stated that its share will now be materially lower than 20%, and we now model less than $1 billion of revenue from Apple in fiscal 2027.

Offsetting the Apple chip losses should be strong growth in other markets, and Qualcomm forecasts 60% growth in nonhandset chip revenue in fiscal 2027. In addition to data center revenue, another year of hearty automotive growth and decent industrial chip growth beyond the data center.

Once the Apple wind-down is out of our model, we project mid-teens revenue growth in fiscal 2028 and beyond, which we think is a proper long-term midcycle growth rate if Qualcomm can capture meaningful exposure to the data center end market. Qualcomm anticipates $40 billion of non-handset chip revenue in fiscal 2029 with $15 billion-plus coming from the data center end market, and we now think this forecast is achievable. Adding this up, we project a 10% CAGR for Qualcomm's revenue through fiscal 2030.

By end market, we model an 11% CAGR for Qualcomm’s chip, or QCT, business. We forecast a negative 5% CAGR in handset revenue, offset by a stellar 27% CAGR in automotive revenue, a 12% CAGR in IoT revenue, and $15 billion of revenue in fiscal 2029 in data centers. We model a 1% CAGR for Qualcomm's licensing business, QTL. The loss of Apple chipset revenue won't weigh on QTL, but we don't foresee much growth or pricing uplift for the smartphone market as a whole.

Throughout our forecast period, we expect Qualcomm to be highly profitable. Qualcomm earned a 35% adjusted operating margin in fiscal 2025. We think these profits will decline modestly as Qualcomm invests more heavily in R&D and growth opportunities. Still, the firm should generate adjusted operating margins of around 30% per year, plus or minus a couple of percentage points in each of the five years of our forecast period.

We assign a narrow economic moat rating to Qualcomm, stemming from intangible assets. The firm’s durable competitive advantage, in our view, comes from patents, intellectual property, and decades of R&D expertise in wireless technologies. The company monetizes this expertise in two forms. First is a licensing model, QTL, where virtually every handset maker pays Qualcomm a royalty to gain access to the company’s essential wireless patents. Second, Qualcomm’s chip business, QCT, has expertise in designing baseband chips and application processors that handle wireless data traffic. We consider Qualcomm’s wireless chipsets to be best-of-breed, enabling the firm to capture a pricing premium and healthy operating margins. Qualcomm is also extending its processor expertise into automotive, PCs, Internet of Things, and data centers. We think it is more likely than not that the company will profit from this expertise for the next decade, and perhaps longer.

We believe Qualcomm controls an extensive portion of the essential patents needed to operate wireless networks. Historically, Qualcomm obtained a near-monopoly on CDMA technology patents in 3G wireless networks, and the firm’s QTL segment was able to charge a royalty fee as a predetermined percentage (3%-5%) of the price of each device sold. The company didn’t develop a monopoly in 4G patents, but certainly contributed enough innovation to warrant earning royalties on virtually all 4G devices as well. In a 5G world, Qualcomm owns a good portion of essential patents, and when combined with backward compatibility with 4G and even 3G, the company is extracting a lucrative stream of royalty revenue from virtually all 5G phones. We think Qualcomm is likely to reinvest in 6G networks and can maintain a licensing revenue stream in the decade ahead. On the downside, however, large smartphone customers may push back on these royalty rates when negotiations come up. Regulators have also pressured Qualcomm’s royalty business in the past and may do so again.

In chipsets (QCT), Qualcomm has leveraged its expertise in wireless networks into chip design, with a significant presence in smartphones. The firm’s marquee products are its set of Snapdragon processors. These chips incorporate the application processor (which includes a CPU, GPU, and other functions that run the apps and operating system on a smartphone) and the baseband chip, or modem (which connects the phone to the wireless network to upload and download data). Qualcomm’s Snapdragon processors are found in most Android devices.

Apple was a longtime customer for Qualcomm’s chips, but only for baseband chips (which Qualcomm discusses as “thin modems”). Apple has now developed its own 5G baseband expertise for its own modems. Qualcomm anticipates retaining only 20% of iPhone units in fiscal 2027 and no modem revenue in fiscal 2028 or beyond. It’s conceivable that others could make similar investments to cut Qualcomm out of the loop, but we think it’d be a long, hard road ahead to do so.

Outside of smartphones, Qualcomm is striving to expand into automotive solutions, including baseband and other connectivity chips for cars, as well as processors used in the digital cockpit and active safety systems. Customer switching costs are typically high in automotive, so we don’t think Qualcomm will easily be displaced in its existing design wins. However, Qualcomm’s automotive business still accounts for a minority of revenue.

Qualcomm has also focused its design efforts on PC and data center processors. Again, even if Qualcomm’s efforts here prove technologically impressive, the company will square off against a host of tech titans like Intel, AMD, Nvidia, and others for these design wins, without a guarantee of success. We would not yet attribute a moat rating to Qualcomm’s budding PC or data center chip businesses.

Qualcomm collects royalty income on the majority of 4G and 5G handsets sold, as it holds many essential patents used in these networks.

Qualcomm is the clear market leader in wireless chips, with a leading market-share position in 5G chipsets and relationships with every prominent smartphone maker. It has leveraged this expertise into the automotive and Internet of Things end markets.

Qualcomm appears poised to gain share in PC CPUs as, after many years of fits and starts, the Windows ecosystem might finally be tilting its support toward CPUs from companies like Qualcomm.

Qualcomm’s chip business faces a host of challenges, from potential share loss at Samsung and Apple, to some of its customers developing mobile processor IP and design expertise in-house.

Qualcomm's licensing business has faced regulatory scrutiny in the US, Taiwan, China, South Korea, and other regions. The biggest threat facing Qualcomm is a negative ruling that states its royalties should not be based on the full price of the phone.

Qualcomm needs to diversify beyond smartphones, which may be challenging as a host of competitors are attempting a similar strategy.