The semiconductor chips industry has become one of the hottest industries in 2023, primarily due to the surging demand for computing chips driven by the rise of generative AI.

However, Qualcomm (QCOM), which also makes chips, did not ride the AI wave. Despite experiencing a double-digit increase in its stock price this year, the mobile chip giant has underperformed compared to other companies that are more closely associated with the "AI megatrend."

This could be attributed to Qualcomm's substantial revenue decline in the fiscal year 2023. However, looking at the guidance for the first quarter of the fiscal year 2024, Qualcomm's revenue is expected to have sequential growth. Could this mark a turning point for Qualcomm?

This article will take you through an understanding of Qualcomm, analyzing its business model, explaining why its stock performance in 2023 was mediocre, and exploring whether there is an opportunity for a reversal in the future.

How does Qualcomm make money?

Established in 1985, Qualcomm initially focused on wireless communication. With over 30 years of technological expertise, it has become one of the global leaders in 5G chipsets for smartphones.

Currently, Qualcomm's business comprises two main segments: QCT (Chip Business) and QTL (Technology Licensing Business):

• QCT derives revenue from the sale of products and services (mainly chipsets) for the wireless telecommunications industry. This business is further divided into three major sectors: handsets（Mobile business）, automotive, and the Internet of Things (IoT).

• QTL controls the patent licensing business, holding nearly all of Qualcomm's patents, and generates revenue from licensing to other companies.

According to Qualcomm's latest financial report, the total revenue for the fiscal year 2023 was $35.8 billion, with the QCT business contributing 85% of the total revenue, and the handsets business accounting for a significant 63% of the total revenue.

This reveals that the mobile business holds a substantial portion of Qualcomm's revenue. Therefore, Qualcomm's business may be closely tied to the overall health of the smartphone market.

Core business: mobile chipsets

As previously mentioned, Qualcomm's primary revenue driver is the mobile chips business

Qualcomm's flagship mobile chip product is the series of "Snapdragon." This product garnered attention from numerous smartphone manufacturers upon its release and is currently utilized by various Android smartphone makers such as Samsung, Xiaomi, Motorola, and others.

According to Counterpoint's data, in terms of shipments, Qualcomm is the second-largest global mobile chipset supplier with a market share of 29%, just behind MediaTek's 30%.

However, Qualcomm's mobile business struggled in the past year. The latest earnings report reveals a 27% year-on-year decline in mobile business revenue for the fourth quarter of the 2023 fiscal year.

As the mobile business contributes significantly to overall revenue, the company's total revenue and adjusted EPS dropped by 24% and 35%, respectively, in the fourth quarter.

If we look at the previous three quarters in FY2023, Qualcomm's revenue and earnings per share have been going down for four quarters in a row, showing a tough time for the company.

Two main reasons might be behind this: first, the whole smartphone market isn't doing well, and second, a decrease in Qualcomm's market share for mobile chipsets.

Global smartphone market

In the last two years, global smartphones experienced a winter period due to factors like component shortages, increased inventory, and extended replacement cycles.

The smartphone industry is now quite mature, with clear cyclicality. The emergence of new technologies, such as 5G, stimulates the demand for phone upgrades, fostering prosperity for device manufacturers. However, as the upgrade cycle concludes, the demand for phone replacements diminishes, leading the entire industry into a downturn.

The good news is that, after 27 consecutive months of year-on-year declines, the global smartphone market shows signs of rebounding, with a 5% year-on-year growth in October 2023. Whether this upturn is sustainable remains to be seen and requires continued observation.

Market competition landscape

Additionally, Qualcomm's position in the competitive landscape of the mobile chipset market is another factor influencing its business.

Currently, the mobile chipset market is highly competitive, with Qualcomm facing challenges from MediaTek and other competitors.

According to Counterpoint data, Qualcomm held a market share of 29% in Q2 2023, an improvement from the previous two quarters but still below the 32% market share in the same period of 2022.

In the future, if Qualcomm can regain some market share in high-end smartphone chipsets from MediaTek, it may have a positive impact on its revenue.

Looking ahead, the potential recovery of Qualcomm's mobile business may depend on two key indicators: the overall health of the global smartphone market and Qualcomm's ability to maintain or expand its market share.

Growth driver: automotive business

The automotive business is considered Qualcomm's future growth engine.

During Qualcomm's Investor Day, the company projected the automotive market to reach $100 billion within the next decade, mainly distributed across connected car chips ($16 billion), digital cockpits ($25 billion), and ADAS/AD ($59 billion).

With such a market opportunity, Qualcomm is actively seizing this transformative moment.

Presently, Qualcomm offers several chips and products specifically designed for the automotive industry, including Snapdragon Ride, Snapdragon Auto Connectivity, Snapdragon Cockpit, and more.

According to Counterpoint data, Qualcomm currently holds the top position as the world's largest automotive chip supplier, commanding an 80% market share.

Despite Qualcomm's strong presence in the automotive chips market, the revenue contribution from the automotive sector remains limited.

In the fiscal year 2023, the QCT segment's automotive business witnessed a 24% YoY revenue growth, reaching $1.9 billion. However, it only accounts for just 5% of the total revenue.

While the automotive business holds promise for future development, its current impact on Qualcomm's overall performance is relatively modest and warrants ongoing attention.

In conclusion:

• Qualcomm makes over 60% of its revenue from the mobile business.

• The recent weak performance may be tied to the sluggish smartphone market.

• Signs of a smartphone market rebound are emerging, but the sustainability is uncertain.

• Qualcomm's automotive business is seen as a future growth driver, yet its current impact on performance is limited.