Nvidia became the world's first trillion-dollar chipmaker this May, making it more than three times more valuable than Intel and Advanced Micro Devices combined. Nvidia's valuation skyrocketed to those record levels as the artificial intelligence (AI) boom created an insatiable demand for its data center GPUs, which are used to accelerate complex machine learning and AI tasks.
Nvidia might still have room to run, but many investors are likely wondering which major chipmaker can follow its lead into the 12-zero club. Could the winner be Qualcomm (QCOM 11.61%), which pushed Nvidia out of the smartphone market nine years ago and became the top producer of premium mobile chips and baseband modems?
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Does the math support a trillion-dollar valuation?
Qualcomm has a market cap of about $140 billion and trades at 3 times its trailing sales. Assuming its price-to-sales ratio holds steady, it would need to grow its revenue at a compound annual growth rate (CAGR) of 32% from 2023 to 2030 to reach a $1 trillion valuation. Yet prior to the pandemic, it traded at about 5 times sales. At that valuation, it would need to grow at a CAGR of 30% to generate $200 billion in revenue in 2030 -- which would be multiplied by five to reach $1 trillion.
That CAGR would represent a massive acceleration from its historic growth rates. Between fiscal 2015 and fiscal 2022 (which ended last September), Qualcomm's annual revenue only rose at a CAGR of 8%. That's because its sales of mobile chipsets and baseband modems were still tightly tethered to the cyclical smartphone market.
If we look back at Qualcomm's revenue growth over the past eight years, we'll notice that it suffered a severe slowdown from fiscal 2015 to fiscal 2017 -- but that its growth accelerated over the following five years as new 5G devices hit the market.
|
Metric |
FY 2015 |
FY 2016 |
FY 2017 |
FY 2018 |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
|---|---|---|---|---|---|---|---|---|
|
Revenue Growth |
(5%) |
(7%) |
(5%) |
2% |
7% |
12%* |
55%* |
32%* |
Data source: Qualcomm. *Non-GAAP basis. Qualcomm's fiscal year ends in late September.
But looking ahead, analysts expect Qualcomm's revenue to actually decline at a negative CAGR of 2% between fiscal 2022 and 2025 as the smartphone market suffers another cyclical decline similar to its downturn between fiscal 2015 and 2017.
That slowdown will likely be caused by the saturation of the 5G market and the further commoditization of smartphones. Other headwinds -- including intense competition from MediaTek in the low-to-mid range smartphone market, its expected loss of Apple as a top baseband modem buyer in 2024, the ongoing tech war with China, and the impact of inflation on discretionary purchases -- could all exacerbate that pressure.
Based on analysts' estimates, Qualcomm might only generate $41.1 billion in revenue in fiscal 2025. To reach $200 billion in revenue from that baseline by fiscal 2030, it would need to grow its top line at a CAGR of 37% over the following five years. It's unlikely Qualcomm will grow that quickly -- especially since the first 6G networks (which would drive the next big upgrade cycle in mobile devices) aren't expected to come online until 2030.
NASDAQ: QCOM
Key Data Points
Investors should look beyond Qualcomm's market cap
It's doubtful that Qualcomm will come anywhere close to reaching a trillion-dollar valuation by the end of the decade. But instead of focusing on its market cap, investors should pay attention to its longer-term strategies.
First and foremost, Qualcomm has been diversifying its business away from the smartphone market with new automotive and Internet of Things (IoT) chips, which generated a combined 23% of its chipmaking revenue in its latest quarter. Over the long term, its automotive business should expand as more automakers launch more connected and driverless vehicles. Its IoT business should also benefit from the expansion of virtual reality, augmented reality, and smart factory markets.
Second, Qualcomm has been cutting costs, repurchasing more shares, and paying consistent dividends as its near-term revenue growth cools off. Those shareholder-friendly strategies -- along with its low forward multiple of 13 and high forward yield of 2.6% -- could make it an attractive play for conservative investors.
Lastly, Qualcomm needs to protect its higher-margin licensing business, which takes a cut of every smartphone sold in the world (even if they don't use its chips or modems), from regulatory probes and OEM protests. Maintaining the health of that business is crucial because it subsidizes the expansion of its lower-margin chipmaking business.
If Qualcomm can succeed on those fronts, it could still be a solid long-term investment. But investors need to maintain realistic expectations: it probably won't become the next Nvidia, and it won't cross the trillion-dollar mark by 2030.
