Believe it or not, old mobile-chip giant Qualcomm (QCOM -1.14%) has been a hot stock so far in 2024. After getting clobbered in the aftermath of the pandemic-era consumer electronics spending spree, shares have rallied to all-time highs and are up nearly 40% so far this year.
There's good reason for this stock price jump. Though the smartphone market is likely to remain tepid, Qualcomm has developed two newer consumer markets that are lifting profitability higher. As a result, the stock could still be a pretty good value right now.
Autos are in overdrive, and are PCs ready to rev?
As I wrote a couple of months ago, Qualcomm is benefiting from a stabilization in the smartphone market this year. Though sales are far from all-out growth, Qualcomm's high-end 5G connectivity chips fetch more dollars per unit than in the past (known as average selling price, or ASP). That's leading to an outperformance of the overall smartphone market for Qualcomm's revenue.
But there are even better things brewing. After years of floundering, Qualcomm's PC business might be about to shift into high gear.
Its Snapdragon X Elite laptop chips are coming this summer. The Snapdragon X for Microsoft Windows laptops is based on Arm Holdings designs, the same architecture Apple uses for its top-notch MacBook lineup.
Why is this significant? It represents a brand-new potential growth market for Qualcomm, which reports very little in laptop sales right now. And this is a very large space for Qualcomm to invade, one currently dominated by Intel (INTC -0.03%) and Advanced Micro Devices (AMD -0.17%) with their x86 architecture for PC chips. Intel and AMD's PC chip revenue was $7.5 billion and $1.4 billion, respectively, in the first quarter alone.
Suffice to say, just a bit of market share in PCs could lead to another incremental growth outlet for Qualcomm, just like its fledgling automotive segment has been in recent years.
Qualcomm's revenue is starting to look very different from historical norms. Source: Qualcomm.
It's all about margin
One of the wonderful things about Qualcomm's business model is that, even during severe cyclical downturns for its primary moneymaker (smartphones), it remains highly profitable. In the next year or two as consumer spending continues to find solid footing in the wake of turbulence from the pandemic and interest rate hikes, Qualcomm's profit margins will rally.
Data by YCharts. TTM = trailing 12 months.
Another drain on Qualcomm's profits has been elevated investment in the PC and automotive chip businesses. As the company starts to log more-significant sales from those development efforts, that will also be a boost to profit margins.
To be clear, Qualcomm isn't going to be the fastest-growing semiconductor business out there. But if higher ASPs on smartphone chips and new growth outlets like Windows laptops and auto chips kick in, it isn't unreasonable to expect an average low-teens growth in earnings per share (EPS) for the next few years.
At 27 times trailing-12-month EPS, or 18 times free cash flow, Qualcomm still looks like a great value to me.
