What happened
Shares of Qualcomm (QCOM +1.45%) had surged by 4.5% as of 3:17 p.m. ET Tuesday, a performance that was all the more remarkable since the tech-heavy Nasdaq Composite was at that point in the session down by 2.8%.
Obviously, there must have been some very positive company-specific news for Qualcomm to defy the sector-wide sell-off. That came from the declaration by a much-followed analyst that Apple's (AAPL +1.50%) efforts to develop its own 5G mobile modem "may have failed," and that Qualcomm will supply 100% of the mobile modems used in the iPhones to be manufactured in 2023.
NASDAQ: QCOM
Key Data Points
So what
On Tuesday, Taiwanese analyst Ming-Chi Kuo at TF International Securities tweeted, "My latest survey indicates that Apple's own iPhone 5G modem chip development may have failed, so Qualcomm will remain exclusive supplier for 5G chips of 2H23 new iPhones, with a 100% supply share (vs. company's previous estimate of 20%)."
If true, this would certainly be fantastic news for Qualcomm, which has seen its valuation multiples contract over the past few years -- even as its results have remained strong -- due to investors' anticipation that it would eventually lose Apple as a major client. Back in 2019, Apple bought Intel's (INTC 0.21%) mobile modem business for $1 billion with the goal of eventually producing its own modems.
Apple has increasingly looked to develop its own chips in order to improve performance and further differentiate its hardware from Android phones and Windows-based PCs. It has already successfully developed the powerful "M" series processor for its Mac computers, displacing Intel's CPUs from them.
However, it appears mobile modems are a tougher nut to crack. Previously, Qualcomm had predicted it would only supply 20% of iPhones in 2023. And since Apple is falling behind on its modem ambitions, who knows how long Qualcomm will retain this business?
Apple has a relatively small share of the global smartphone market, with a percentage in the high teens to the low twenties. However, it controls an outsized share of the market for higher-priced premium phones. Therefore, the news is a big deal, especially since Qualcomm's low price-to-earnings ratio of around 13 indicates that investors are valuing it with the expectation that it will face growth struggles in the years ahead.
Now what
Investors will have to see if the conclusions Kuo drew from his survey turn out to be true. If he's right, that only bolsters an already-solid investment case for Qualcomm. Notably, management has been diversifying the company's revenue streams away from mobile devices, gaining ground in high-growth segments such as automotive chips, Internet of Things chips, and radio frequency chips for 5G radios. Last quarter, Qualcomm's automotive segment revenues were up 41% year over year, and its IoT division sales were up a whopping 61%.
Those newer segments accounted for one-third of revenue last quarter, and they should continue to deliver strong growth for the rest of this decade, which would offset any potential loss of business from Apple. Yet if the tech giant sticks with Qualcomm as a key supplier for a bit longer, the chipmaker should enjoy stronger and smoother growth than investors have expected. All in all, Qualcomm still looks like a great value stock, even after Tuesday's bump.
