AI and Connectivity Drive Qualcomm's Growth: Analyst Eyes Flourishing Prospects Amidst Inventory Corrections

Mizuho analyst Vijay Rakesh reiterated Qualcomm Inc QCOM with a Buy and a $140 price target. The analyst listed his CFO Akash Palkhiwala's call takeaways.

AI at the Edge added features driving 7 billion - 70 billion AI training and new use cases with content creation, security, and smart recommenders, with QTL benefiting from QCT pull-through.

QCOM noted that ten billion+ parameter models will likely run on devices in the coming months, with lower latency and better security than the cloud. He sees a potential requirement for 8-10GB+ of on-device RAM to meet the demand, leading to new use cases at the Edge across a broad spectrum of end-markets, including a) content creation (audio, video, gaming, text, among others), b) enhanced security, c) smart recommenders, and d) virtual assistants.

Accelerated adoption of said AI use cases could lead to tailwinds for QCOM. With expectations for AI inference to take a significant share of AI workloads (vs. training) in the longer term, QCOM could benefit.

Rakesh believes QCOM continues to see 10% Y/Y content growth (as seen for the last three years) for its premium tier content, driven by demand for integrated SoC chip capabilities including AI, connectivity (Wi-Fi), and security, led by its Snapdragon 8 Gen 3 ramping now and future Gen 4 (potentially ramping 2024E on 3nm). Potential long-term value proposition could include "Low Power integrated silicon" persistent compute capabilities for Gen AI, as mentioned above, and power/performance advantages with integrated CPU, GPU, NPU, and Wi-Fi/connectivity. 

QCOM noted that it continues to see customer inventory corrections as it moves through the second half of FY23E. Rakesh believes customer inventories in FY23E have progressed in line with QCOM expectations, as some customers have seen elevated inventories mostly flushed out while others are still a work in progress. 

China remains a headwind, with many customer inventory corrections taking longer than expected as demand remains relatively muted in CY23E. He believes handset demand is still trending down ~10% Y/Y, in line with QCOM expectations.

 QCOM noted it sees China flat Y/Y in CY24E as the demand picture remains murky.

QCOM noted local domestic competition from Hi-Silicon 5G and Unisoc but saw competition as performance-challenged, with manufacturing at modified 12nm node or legacy 4G performance.

Rakesh's September quarter revenue and proforma EPS remain at $8.5 billion and $1.90 (consensus $8.5 billion and $1.91). 

QCOM remains well-positioned with strong long-term IoT trends, further design wins in auto, and the potential for handsets to return to growth in CY24E following prolonged inventory corrections and strong cash generation.

Price Action: QCOM shares traded higher by 1.36% at $110.96 on the last check Wednesday.