Qualcomm's (QCOM -2.36%) first automotive-investor day has brought attention to the company for something other than smartphones. The chip designer has diversified into non-smartphone products. While much of its previous effort has focused on the metaverse, Qualcomm is now making its mark on the automotive sector.
The question for stockholders and prospective investors is, how will the automotive pivot drive the stock? Let's take a closer look.
Qualcomm's automotive-investor day
Qualcomm gained attention in the automotive sector when it announced a "breakthrough automotive processor" in 2016. However, 2022 may be the year that puts the Qualcomm automotive segment on the map. After launching the Qualcomm Digital Chassis in January, the company has followed up with the recent investor day.
Its digital chassis applies 5G, telematics, location, and other technologies combined into a set of cloud-connected platforms. This manages a car's communications within a digital cockpit, as well as driver assistance and autonomous-driving functions.
With such functionality, Qualcomm now estimates the size of its design-win pipeline at $30 billion, an increase of more than $10 billion since its recent earnings report. Additionally, Qualcomm believes its total addressable market will grow to $100 billion by 2030, and it has projected its automotive revenue-growth accordingly.
| Qualcomm-Projected Automotive Revenues | |
|---|---|
| Fiscal 2022 | $1.3 billion |
| Fiscal 2026 | $4 billion |
| Fiscal 2031 | $9 billion |
Source: Qualcomm.
The investor conundrum
For what it's worth, I'm a Qualcomm shareholder who's optimistic about its segments, including automotive. In a few years, I believe the digital chassis will boost the investment case for buying and owning this semiconductor stock.
The problem is that Qualcomm has not yet reached that point. In its fiscal third quarter (which ended June 26), automotive brought in $350 million in revenue. This amounts to approximately 3% of the company's revenue.
By comparison, handsets made up about 56% of the company's revenue and grew by 59% year over year, faster than automotive, which grew 38%. Still, Qualcomm expects an eventual slowing in the handset market. Once 5G upgrades slow, it looks increasingly likely that automotive and other segments will drive more growth.
However, with the upgrade cycle in 5G, handset growth has remained rapid. This led to 36% revenue growth in Q3 for Qualcomm overall and a 53% increase in net income as Qualcomm kept the growth of costs and expenses in check.
Additionally, investors may not appreciate the company's current valuation. Despite its growth, Qualcomm stock trades at only 11 times earnings. This is lower than every major chip company except for Intel. But unlike Intel, Qualcomm is a technical leader, indicating significant undervaluation in the stock.
Consider Qualcomm stock, but not yet for automotive
Qualcomm is a high-growth chip stock at an excessively low valuation. This situation could mean that it's time to buy Qualcomm stock. Moreover, after its automotive-investor day, Qualcomm's future looks promising in the automotive sector as smartphone chipsets presumably become a less prominent revenue driver.
However, investors looking for an automotive driver for revenue may not find it in Qualcomm just yet. While it should become an increasingly significant player in the automobile sector, Qualcomm stock will likely be more heavily tied to its other segments for the foreseeable future.
