📱 Is Qualcomm's Diversification Strategy Paying Off?

📱 Qualcomm: A Chip In Time Saves Nine?

World’s largest smartphone chipmaker Qualcomm (QCOM), beat analyst expectations in the third quarter despite the world’s struggle with chip shortage. The company’s plan of diversifying the suppliers for its essential products seems to be paying off. Shareholders are a happy lot! (Tweet This)

“Smart” ly Weathering The Storm

The handset business is on fire! Demand for devices that run on the new and faster 5G networks is shooting through the roof. Qualcomm’s supply prioritization ensured the company beat analyst expectations in Q4.

Key Stats From Q4:

• Revenue: $9.3B Vs $8.86B expected
• EPS: $2.55 Vs $2.26 expected.

Qualcomm expects revenue of ~$10.4B and EPS of around $3 per share for the current quarter. Both projections are higher than analyst estimates of $9.73B and $2.58 per share, respectively.

Qualcomm’s phone-chip business grew 56% Y-o-Y to $4.7B during the quarter, propelled by Android smartphones. The company has projected smartphone chip sales will hit a record in the current quarter. As a result, it is prioritizing that product line over some of its less profitable businesses.

CEO Cristiano Amon believes that despite the great performance, there are still pockets of unmet demand. He expects supply to improve by the year-end and into 2022. Qualcomm’s internal teams had planned for the growing demand for smartphones, and that’s exactly how things had transpired.

IoT or the Internet of Things is helping bring online connections and electronics to a wide range of appliances. Qualcomm’s chips are appearing more in tablets, VR handsets, and wearables. Sales of the company’s IoT division rose 66% year-on-year to $1.54B last quarter.

The Veoneer Saga

San Diego, CA-based Qualcomm created redundancy in its supply chain by having more than one provider make three of its key products. Its outsourcing partners have been companies like Taiwan Semiconductor Manufacturing Co. and Samsung.

Even as the smartphone chip business grew, Qualcomm has been working on diversifying its revenue stream. It is looking to sell chips to automakers, for instance. Its automotive electronic business reached a $1B run rate annually with a design win pipeline of over $10B.

To bolster its presence in this space, the company pulled the carpet from underneath Magna International’s feet earlier this year, when it bid $4.6B in cash to acquire Swedish automotive technology firm Veoneer. This, after the target’s board, had already accepted an offer from Magna.

Veoneer promptly aligned with Qualcomm through a complex structure. Last month, Veoneer accepted a bid from investment firm SSW Partners to be acquired for $4.5B. For terminating its agreement with Magna, Veoneer even paid a termination fee of $110M to Magna.

As per the agreement, SSW Partners will acquire all of Veoneer’s outstanding shares. SSW will then sell Veoneer’s Autonomous Driving Software Operation, known as Arriver, to Qualcomm. Arriver’s Computer Vision, Drive Policy, and Driver Assistance assets will be incorporated into Qualcomm’s Advanced Driver Assistance Systems (ADAS) business.

Qualcomm also buried the hatchet with Apple and is now supplying modem chips to the iPhone. This arrangement may be short-lived since Apple is exploring developing its chips. Be that as it may, given that most of Qualcomm’s growth comes from Android smartphones, Apple’s plans don’t immediately hurt the chipmaker.

Qualcomm’s shares surged last week and returned to positive territory for the year. However, it continues to underperform the Philadelphia Semiconductor Index, which is up ~30% this year. Investors hope the Veoneer acquisition will nicely complement the smartphone business, enabling the shares to accelerate further, faster!

Market Reaction
QCOM ended at $165.85, up 1.73%. Shares are up 12% this year.

Company Snapshot 📈

QCOM $165.85 +2.82 (1.73%)

Analyst Ratings (30 Analysts) BUY 63%  HOLD 37%  SELL 0%