Qualcomm’s Smartphone Future Looks Brighter With AI
AI-enabled smartphones and PCs should help the maker of wireless chips, which remains among the cheapest in semiconductor stocks
The irony of an AI iPhone is that it could also help one company that Apple AAPL 5.98%increase; green up pointing triangle is least interested in helping.
Investors are increasingly enthusiastic about such a device following Apple’s latest earnings. Those results showed a pronounced weakness in iPhone revenue during the March quarter, but that was already expected, and the company cushioned the news with a generous stock buyback. Chief Executive Tim Cook also used the occasion to further tout Apple’s interest in generative artificial intelligence, which has analysts more convinced that an AI-enabled iPhone is on the horizon. Ben Reitzes of Melius Research predicted “an AI-driven iPhone supercycle is likely coming in 2025” in his note to clients. Apple’s shares jumped 6% on Friday, the stock’s best single-day gain in 18 months.
That followed an even better day for Qualcomm QCOM -0.26%decrease; red down pointing triangle. The maker of modem chips used in the iPhone and many other wireless devices saw its stock jump nearly 10% on Thursday after its own March quarter results, where chip sales were helped by AI-enabled Android phones such as Samsung’s latest Galaxy family that went on sale in January.
A growing number of smartphones and personal computers with AI processors and capabilities embedded in the hardware are making their way to the market this year. Such on-device AI offers benefits such as faster speed in processing AI tasks as well as greater privacy—as less data has to go back and forth between the cloud for such tasks. Samsung’s Galaxy S24 phones offer functions such as real-time translating and image-based web search. The market has been receptive; unit sales of the S24 phones during their first three weeks after launch were up 8% from the previous Galaxy family’s sales last year during the same window, according to Counterpoint Research.
The launch of an AI-enabled iPhone would likely further juice the market for on-device AI, given Apple’s marketing prowess. And that would be a major benefit for Qualcomm, even given the two companies’ longstanding animosity. Qualcomm has long dominated the market for modem chips—also known as basebands—that handle the task of connecting a device to a carrier network. Its Snapdragon central processor is also the main computing chip for a variety of Android phones, including the latest from Samsung. And it has a growing business in the RF (radio frequency) chips that work with basebands to filter interference and boost signal strength.
For smartphones processing demanding AI algorithms on the device, the ability of such components to work closely together while conserving power becomes paramount. That plays to Qualcomm’s advantages—particularly among the wireless components that the company has a long-established expertise in. “If AI is in a phone, the computer and memory is going to consume more power,” said TD Cowen analyst Matt Ramsay. “If you want the battery life to be the same, where are you going to get the power budget from? Modem, RF and screen.”
That could even help extend the life of Qualcomm’s contentious business with Apple, which has long been working to get Qualcomm’s chips out of its devices. Apple’s failure to develop its own modem led to the two companies extending their deal last year. Qualcomm is also believed to have won a place for its RF chips in this year’s coming iPhone lineup after chip maker Skyworks told investors during its own quarterly call last week that it lost that socket. In a note to clients, UBS analyst Tim Arcuri said “as time goes on without an Apple modem, Qualcomm’s leverage grows arguably stronger as AI requires much tighter modem/RF integration to keep battery life manageable.”
Qualcomm is also making a major play in AI-enabled PCs, a large number of which are expected to launch later this year. Any share gains in PCs would represent pure upside for the company, as it has little presence there now. Microsoft’s Build conference later this month is expected to showcase many new AI-enabled laptop computers, including models powered by Qualcomm’s Snapdragon processor.
Much remains to be seen about whether on-device AI can actually spark a much-needed boost in sales for smartphones and PCs, two largely mature markets. But unlike many other chip stocks, Qualcomm’s current valuation isn’t reflecting much in the way of AI hype. The shares closed Friday around 17 times forward earnings—a 39% discount to the PHLX Semiconductor Index’s near-decade high multiple of 28.3, according to FactSet. Helping sell a few more smartphones by making them even smarter could go a long way.