The smartphone business has been the cornerstone of Qualcomm's (QCOM +0.48%) growth in recent years, but the chipmaker has been taking steps to diversify its revenue streams by tapping fast-growing markets with massive potential.
Automotive and the Internet of Things (IoT) are two such verticals that could supercharge Qualcomm in the long run and complement the company's solid position in the smartphone market. The good part is that the company has started gaining impressive traction in automotive and IoT, as its latest quarterly results indicate.
Let's look at the reasons why these two business segments could move the needle in a big way for Qualcomm in the long run.
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The automotive business is stepping on the gas
Qualcomm turned in a terrific fiscal 2022 second-quarter earnings report on April 27, delivering a 41% year-over-year increase in revenue to $11.2 billion and a 69% spike in adjusted earnings to $3.21 per share. Sales of smartphone chips accounted for a major chunk of Qualcomm's revenue at $6.3 billion. The automotive business, meanwhile, generated just $339 million in revenue, which means that it supplied just over 3% of the chipmaker's top line.
However, it is worth noting that Qualcomm's automotive revenue increased an impressive 41% year over year last quarter as its digital cockpit platforms moved into the production phase. The chipmaker had announced its fourth-generation automotive cockpit platform in January 2021 and expected the same to move into production in 2022.
More importantly, Qualcomm is witnessing solid interest in its automotive platforms from several automakers and component suppliers. This is evident from the company's automotive design-win pipeline, which stood at $16 billion at the end of the fiscal second quarter, an increase of $3 billion from the first quarter.
NASDAQ: QCOM
Key Data Points
Such an impressive design-win pipeline points toward robust growth in Qualcomm's automotive revenue, as it means that its chips have been designed into customers' products. That will translate into sales once those products move into production. It won't be surprising to see Qualcomm turn this impressive pipeline into actual revenue as it counts key automakers such as Stellantis, BMW, General Motors, and Hyundai, among others, as its partners.
What's more, Qualcomm's automotive design-win pipeline could increase further, thanks to the growing demand for different systems such as ADAS (advanced driver-assistance systems), vehicle telematics, and high-performance computing to power applications such as digital cockpits. Mordor Intelligence estimates that the global automotive semiconductor market could clock 17% annual growth through 2026 and hit $37 billion in revenue at the end of the forecast period, indicating that Qualcomm is scratching the surface of a massive growth opportunity.
The IoT business has gained critical mass
Qualcomm generated $1.7 billion in revenue from the IoT business last quarter, an increase of 61% over the prior year. CEO Cristiano Amon said on the April earnings conference call that the company is witnessing solid traction across all IoT categories -- consumer, edge networking, and industrial.
IoT has turned out to be Qualcomm's fastest-growing revenue stream in the first half of the current fiscal year, driven mainly by industrial applications. The chipmaker has benefited from an increase in demand for rugged handheld devices within industrial IoT for use in different applications such as warehousing, logistics, and robotics.
With the industrial IoT market expected to clock nearly 23% annual growth through 2028, it could turn out to be a nice growth driver for Qualcomm in the long run. Again, Qualcomm management points out that the company's serviceable addressable market in IoT is "effectively unlimited." That's not surprising, as the demand for IoT chips is expected to grow at an eye-popping pace. According to a third-party estimate, the global IoT chip market could hit $27.6 billion in revenue by 2026 as compared to $12 billion in 2020.
In all, the size of new opportunities that Qualcomm is targeting could accelerate its growth. Throw in the company's impressive position in the smartphone market, and it is easy to see why this is a semiconductor stock that investors may want to buy right away, especially considering its valuation.
Qualcomm stock is trading at just 15 times trailing earnings, which is quite cheap considering the company's impressive pace of growth and the Nasdaq-100's earnings multiple of 30. With additional and lucrative catalysts such as automotive and IoT coming into play, buying Qualcomm looks like a no-brainer as the stock seems set to go on a bull run.
