Artificial intelligence (AI) has been a game changer for many companies that are capitalizing on the growing adoption of this technology, and it's sending their shares soaring. From Nvidia to Palantir Technologies to Oracle to SoundHound AI, companies across diverse industries have seen their stocks pop. The rapid rise in the stock price of such companies has made them expensive to buy right now. Nvidia, for instance, trades at 58 times trailing earnings, while Palantir has a sales multiple of 38.
Still, there are select companies that have AI connections but have not yet felt the full impact of AI on their businesses yet. As a result, these companies trade at attractive valuations, giving investors an opportunity to buy potential AI winners at reasonable prices.
Let's take a closer look at the prospects of Qualcomm (QCOM 2.63%), a stock that's set to benefit from multiple AI-focused verticals. Shares of the chipmaker have delivered underwhelming returns of just 15% so far in 2024, underperforming the broader PHLX Semiconductor Sector index's comparable returns of 24%. AI has real potential to supercharge Qualcomm's growth and stock price in the long run. Let's look at the reasons why.
NASDAQ: QCOM
Key Data Points
A closer look at Qualcomm's AI-related catalysts
Qualcomm made its name as a designer of smartphone application processors. The company controlled 31% of the smartphone processor market in the second quarter of 2024, according to Counterpoint Research. This makes Qualcomm the second-largest player in this space, just behind MediaTek, which holds 32% of the market.
What's worth noting is that Qualcomm controlled 29% of the smartphone processor market in the second quarter of 2023, while MediaTek's share stood at 31%. So, Qualcomm has been gaining ground in this space, and AI seems to be playing a role in the chipmaker's improved standing. Counterpoint estimates that shipments of generative AI smartphones could hit 550 million units in 2027, jumping 4x from this year.
The market research firm also adds that Qualcomm is set to lead the market for AI smartphone processors this year with a share of almost 50%. MediaTek is expected to be far behind at 13%. It is worth noting that Qualcomm's processors are already powering popular devices such as Samsung's Galaxy S24 series. The company has also gained impressive traction among Chinese manufacturers, with its revenue from China increasing by 50% year over year in the third quarter of fiscal 2024.
As such, Qualcomm is setting itself up to make the most of a fast-growing AI opportunity in the form of smartphones. But this is not where the company is going to stop. The company has also set its sights on the market for AI-enabled personal computers (PCs). Qualcomm pointed out on its July earnings conference call that the likes of Microsoft, Dell, Acer, Lenovo, HP, Samsung, and Asus are offering over 20 AI-enabled PC models powered by its processor.
More importantly, the company says that it is already working with PC manufacturers on AI-enabled models for 2025 that would be capable of running generative AI applications locally. The availability of more Qualcomm-powered AI PCs would allow the chipmaker to tap another fast-growing market. That's because sales of AI PCs are set to jump by 165% next year, according to Gartner. The research firm estimates that 43% of all PCs shipped next year will be AI-capable, which means that this market will still have more room for growth.
The valuation and growth potential make this stock an enticing buy right now
Qualcomm recently finished fiscal 2024, and analysts expect the company to report an 8% increase in revenue for the year to $38.6 billion, along with a 20% increase in earnings to $10.08 per share. More importantly, consensus estimates project the company's earnings to increase at an annual rate of 12.6% for the next five years.
There is a good chance that Qualcomm could clock faster growth than analysts expect, but even if it manages to grow in line with consensus estimates, its bottom line could jump to $18.24 per share after five years. Qualcomm is currently trading at 21 times trailing earnings and 15 times forward earnings, which means that it is cheaper than the Nasdaq-100 index's earnings multiple of 31 (using the index as a proxy for tech stocks).
The Nasdaq-100 has a forward earnings multiple of almost 30. Assuming Qualcomm trades at even 25 times forward earnings after five years (at a discount to the index), its stock price could jump to $456. That would be a 173% jump from current levels. So, investors looking to buy an AI stock that's attractively valued and has the potential to deliver robust gains should consider buying Qualcomm before it steps on the gas.
