In the mobile chip industry, Qualcomm stands out as a major player. Most high-end Android phones are powered by Qualcomm's Snapdragon series chips, and even though Apple uses its own A-series chips, it still pays Qualcomm licensing fees for modem technology.

Thanks to its dominant position in mobile chips and its strategic moves in AI and PC chips, Qualcomm's stock has surged over 20% this year, making it a standout in the semiconductor sector.

$Qualcomm (QCOM.US)$ will release its latest earnings results after the market closes on November 6. Each earnings release may signal a potential investment opportunity, but before diving in, investors need to understand how to interpret their financial statements.

Can Qualcomm maintain its impressive performance? To find some answers, let's delve into its financial report, with a focus on four key areas: core business, growth drivers, inventory levels, and profitability.

1. Core business

A company's core business typically represents its largest revenue segment. For Qualcomm, this includes its chip-related business (QCT) and technology licensing business (QTL). QCT makes up 85% of total revenue, with mobile chips being the primary driver, accounting for about two-thirds of total revenue. The remaining 15% comes from QTL, largely from mobile manufacturers like Apple.

Clearly, Qualcomm's core business is mobile chips. After a period of decline, Qualcomm's mobile chip revenue has grown in the last two quarters.

So, what is the future outlook for this segment? Let's explore two key factors.

First, the overall growth of the mobile industry. If mobile sales are strong, demand for Qualcomm’s chips may rise. Conversely, weak mobile sales will pressure Qualcomm's chip sales. According to IDC data, global mobile shipments have stabilized and rebounded over the last three quarters after a two-year decline. This recovery has boosted Qualcomm's mobile chip business.

Looking ahead, we need to see if AI-driven demand for new devices will further rejuvenate the mobile industry, which is important for Qualcomm's sustained growth in mobile chip sales.

Second, the competitive dynamics in the global mobile chip market. Currently, MediaTek, Qualcomm, and Apple are the top three players by shipment volume. Since Apple's chips are primarily for internal use, the main competition is between MediaTek and Qualcomm. Mobile sales tend to be seasonal, so it's useful to compare quarterly market shares.

In the first quarter of the past five years, Counterpoint data shows a gradual decline in Qualcomm's market share. While Qualcomm dominates the high-end segment with higher-priced chips, MediaTek has been making inroads into this market with its Dimensity 9300 chip featured in several high-end Android flagships. This competition is challenging Qualcomm's lead in the premium market.

As MediaTek gains ground, Qualcomm's core business faces potential risks. We need to watch whether Qualcomm can stabilize and regain its market share to secure its core business.

2. Growth drivers

Among Qualcomm's current business segments, the only area showing consistent growth is its automotive chip products.

Qualcomm primarily focuses on smart cockpit chips, where it holds a dominant position. As the electric vehicle (EV) industry rapidly grows, Qualcomm's automotive chip revenue may be also on the rise.

In recent quarters, Qualcomm's automotive chip revenue has been accelerating. In Q3 of fiscal 2024, it reached $811 million, a year-over-year increase of 86.9%. However, despite the strong growth, automotive chips still account for less than 10% of Qualcomm's total revenue. This means that although the growth rate is impressive, its contribution to overall revenue is still limited. In future financial reports, we may monitor whether Qualcomm's automotive chip revenue can maintain its strong growth, thereby increasing its share of total revenue and driving overall growth.

Beyond automotive chips, Qualcomm's foray into the personal computer (PC) chip market may also become a new growth engine. Traditionally dominated by Intel and AMD, the PC chip market is poised for disruption with the advancement of AI technology, and Qualcomm aims to be a key player.

In May 2024, Microsoft released its latest Surface tablet featuring Qualcomm's Snapdragon X Elite chip. Major PC manufacturers like Lenovo, Dell, and HP are also expected to launch AI PCs powered by Qualcomm chips.

How much additional revenue could AI PCs bring to Qualcomm? During the Q2 fiscal 2024 earnings call, management indicated that PC business revenue contributions would start in 2025, though they did not provide specific revenue guidance. According to Bank of America analysts, Qualcomm is projected to capture 70% of the AI PC chip market, contributing between $286 million and $861 million in revenue by 2025. However, initial revenue contributions are expected to be modest.

Qualcomm's stock once surged in May 2024, largely driven by excitement over the launch of its AI PC chips. Moving forward, we should continue to watch for further guidance from Qualcomm's management on the AI PC chip business and track revenue growth beyond 2025.

3. Inventory levels

Qualcomm's revenue mainly comes from mobile chips, making inventory levels an important indicator of the industry's cyclical changes and growth expectations. When demand decreases and there's an oversupply, inventory levels rise, increasing sales pressure and potentially hurting stock prices. Conversely, when the cycle turns and demand improves, inventory levels drop, and sales prospects brighten.

A useful metric for assessing inventory levels is the inventory-to-revenue ratio. The higher this ratio, the greater the inventory level and sales pressure. During 2020-2021, Qualcomm's inventory-to-revenue ratio was healthy, mostly staying below 35%, and the stock price trended upward accordingly.

However, as the mobile industry entered a downward cycle in 2022, Qualcomm's inventory-to-revenue ratio climbed, peaking at nearly 80% in Q3 2023. During this period, Qualcomm's stock performance also struggled.

In recent quarters, Qualcomm's inventory-to-revenue ratio has started to improve, and the stock price has rebounded to new highs. However, the current ratio remains higher than the 30%-40% range seen in the past. Moving forward, we need to keep an eye on future financial reports to see if this trend of improvement continues.

4. Profitability

As the mobile industry experiences a cyclical rebound, the improvement in Qualcomm's profitability may be a key focus for the market.

From a gross margin perspective, as global mobile sales recover, Qualcomm's overall gross margin has also risen, albeit slowly, from a low of around 55% to about 56%. This improvement is modest and still falls short of the previous peak of approximately 60%.

Regarding net margin, Qualcomm has improved from around 17% to approximately 23%, but there is still room to grow compared to the previous high of over 30%.

In future financial reports, we should continue to monitor whether Qualcomm's gross and net margins can further improve.

Having read this far, you may now have a deeper understanding of how to interpret Qualcomm's financial reports. It's noteworthy that the release of earnings reports from prominent companies may present unique trading opportunities for different types of investors.

For instance, if an investor, after analyzing past reports and considering recent developments, believes a company's latest earnings will send positive signals and boost the short-term stock price, they might consider taking a long position. This could involve buying the underlying stock or purchasing call options.

Conversely, if the investor expects the earnings to be unfavorable and potentially pressure the stock price, they might consider taking a short position, either through short selling or buying put options.

If the report's outcome is unclear but volatility is expected, they might use a straddle strategy, buying both calls and puts.

However, investors should carefully assess their risk tolerance, particularly when considering high-risk trades like short selling or options, before making any trading decisions.

Summary

When reading Qualcomm's financial reports, we should focus on four key aspects: core business, growth drivers, inventory levels, and profitability.

1. Core Business: Qualcomm's primary revenue source is its mobile chip business, which is heavily influenced by the mobile industry's shipment cycles. The stability of this core business largely depends on Qualcomm's ability to reverse the trend of declining market share.

2. Growth Drivers: Qualcomm's current growth driver is its automotive chip business, with potential future growth from AI PC chips. Monitoring the revenue scale of these segments may help us gauge whether they can accelerate Qualcomm's overall revenue growth.

3. Inventory Levels: The inventory-to-revenue ratio is closely tied to stock performance. Currently, this ratio is improving, and we should watch if the trend continues.

4. Profitability: Qualcomm's profitability is rebounding. We may observe the improvements in gross and net margins to assess if this upward trend is sustained.

Each earnings report may present new investment opportunities, so investors should align their strategies with their risk capacity.