The Six Five team discusses Qualcomm’s latest earnings release.
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Patrick Moorhead: You and I had the chance to talk to both Christiano and Akash and get upfront, close and personal with the whole thing. It was a rough result for Qualcomm in the marketplace.
I’ll be honest, I was a little bit surprised. I’m not normally surprised. I can look at how they did, what they said, what their forecast was. They beat on EPS by almost three and a half points. They missed slightly on revenue, but quite frankly this was really all about uncertainty in smartphones overall in Android, but I would say specifically in China. Because the result, even the guide was in line with expectations. Companies had great execution. You’re not seeing any major hiccups like you’ve seen with other chip makers. There really were no surprises about what was said with China and even Android. Probably the one thing that was thrown out there, that by the way was a rumor again two weeks ago was Huawei getting back into the market that could give us some competition to Qualcomm, but Qualcomm basically said, “Hey, it’s not meaningful revenue today and we’re zeroed out.”
And then for Apple, they zeroed out the forecast into 2024 and 2025. Again, it’s an oddity. One thing, again, I always want to look at puts and takes on it. I don’t want to sugarcoat anything, but I have to give the company credit where credit is due. On the AI side, I don’t necessarily think that the company knew what to say about AI and I completely understand that quite frankly when you’re trying to balance China, you’re trying to balance Android and overall you don’t want to be too bullish about it, particularly when it’s not a bird in hand. Meaning it’s more of a 2024 thing and 2025 thing. But I did like their expression of it, which was essentially, so first of all, AI is going to permeate everything if we do the double click on smartphones and PCs. First of all, PCs is a brand new market for them.
They have 0.1% market share in, but more importantly in smartphones, the potential to charge more, the potential to have a TAM expansion. Again, hard to lean into that when the entire market is down now. And the other one is share shift. They floated all three at least as the hypothesis of what it could be. I’m looking forward to what the company has to say about its next generation products. I think it’s in October, you and I are going to fly, roughing it out there in Maui to hear the latest and greatest technologies that they’re going to bring out.
Daniel Newman: I think that one was mine, but you did such a good job, I just let you run with it.
Patrick Moorhead: Oh, my gosh.
Daniel Newman: No buddy, listen.
Patrick Moorhead: I’m so sorry.
Daniel Newman: Listen. This is about dynamysism. Is that a word? Dynamysism.
Patrick Moorhead: I think, dynamism.
Daniel Newman: Dynamism.
Patrick Moorhead: Sorry about that. Gosh darn it.
Daniel Newman: The -ism. That’s all right. And you got to do the next one too, because I want to see you keep rolling. Okay, so here’s the thing, Pat, markets hate opaqueness. The biggest problem with Qualcomm was not its result. Its result was very much in line with the way it had set the expectation and their execution was good. The margins looked okay. The beat on EPS was good, the revenue was a thin range. The guide fell within range, but it was the commentary. My personal opinion was it was more about the commentary. It was more about, “We’re not sure what’s going to happen with China.” Well, people get nervous when you say you’re not sure. I think seeing the disparity between Android and Apple, which isn’t really all Qualcomm’s fault by the way, that’s more to do with the Samsungs and the other OEMs and their ability to market a compelling product. That was a bit of a problem.
The AI story is a bit of a problem because Qualcomm does an amazing job with AI and they’ve been doing an amazing job with AI and they’ve had some of the most capable NPUs, GPUs in their phones, whether it’s for gaming, whether it’s for sensors, images. They’re doing really cool things with LLMs on the devices using stable diffusion. But just like 5G, there’s been a little of a gap of where does that create money for Qualcomm? Where are they going to charge more? Are the OEMs going to pay more for this content that they’re putting in the devices? Are end customers going to buy apps that are ultimately going to drive premiums for the phones? Are we going to see a refresh cycle accelerate because people are going to want to buy more of these new phones because the new phones are going to have AI capabilities that the old phones don’t have? And not being able to share that I think creates a little bit of consternation within the analysts’ community, which then trickles out in their commentary to investors.
The real positive thing though, Pat, is Qualcomm’s all over AI. They’re all over AI, but there’s some time between now and when that becomes clear in terms of where the revenue opportunities lie. Their automotive business should be exciting, people. They’ve absolutely crushed it quarter after quarter and you’re seeing momentum. Every quarter you’re talking a 100 million more, a 100 million more and a bunch more design wins. And that’s going to suddenly take the company into a new space because all these OEMs that are working with Qualcomm have massive needs to electrify and to add AI and autonomy to their vehicles. Qualcomm’s been the winner here. You can look at Nvidia and Nvidia’s early lead there and they’ve seeded the early lead. Now, obviously they’ve found other revenue streams and their earnings are probably going to look pretty great, but in automotive, Qualcomm has actually done a tremendously good job. They were tremendously large in their revenue. I wanted to practice doing a former president thing there. But the bottom line, Pat, is it’s the lack of clarity. What’s up with Apple? What’s up with Huawei? What’s up with China?
There just was too much uncertainty in the numbers, that was what you saw the response to. The execution wasn’t the problem. It’s the guide and the guide and the lack of knowing what’s going to happen is never a good thing in the investor community. But you know what? You’ve got to give appreciation for them being honest, being open, because it’s sometimes better when you’re a public company like that to get it on the table. And then you know what? Maybe things will get better and then they’ll beat it handedly and people will be happy, but if they overestimate or they sound overly confident and then miss, they’ll get punished even worse in the future. It was a tough needle to thread. I thought they did a pretty good job of it. But don’t mistake that kind of reaction for a technological problem. It’s not a technological problem, it’s just the clarity is not there right now and hopefully it’ll come through this quarter.
Patrick Moorhead: I think as the midterm growth gets more confident, I think it’s all going to pull together and people are going to fully understand what the company brings to the table.