MWG Focus Stock: Qualcomm

Qualcomm (QCOM-Nasdaq)

Written by CEO & CIO, Bruce Murray, CFA.

Qualcomm was founded in the mid-1980s and emerged as the leading cellphone technology company with its branded “Snapdragon” line of communication chips in the 1990s. Its CDMA (code-division-multiple-access) technology, patented in 1986, became the standard for leading cellphone networks. Cell phone manufacturers such as Apple and Samsung became Qualcomm’s major customers. Ericsson’s competing TDMA (time-division-multiple access) technology fell by the wayside as it could not match CDMA’s network capacity. CDMA can carry a massive volume of wireless data and differentiate by assigning a code to each call or data user, simultaneously allowing large numbers of network users. TDMA assigns network time to each user thus restricting volumes. Qualcomm’s fortunes moved forward with each leap (generation) of cellphone technology. The rally in the stock price from 2020 to 2022, as seen in Figure 1, was reflective of the rollout of 5G technology, which you likely have in your cellphone if it was purchased in 2020 or later.

Competitive pressure from major communications network companies and governments has forced Qualcomm to license access to its portfolio of some 264,000 patents to other manufacturers. For that access, it receives about US$30 per cellphone device. Due to its technological dominance, Qualcomm has been a patent lawyers bonanza, with the company paying fines and settlements totalling many billions of dollars to governments and other telecom companies around the world (BlackBerry even got $815 million in 2017).

Apple and Qualcomm were suing each other for years, as Apple pays billions annually to Qualcomm for chips and technology. Still, the companies settled, with Qualcomm coming out on top when Apple tried, but could not match, the productivity of Qualcomm chips. This settlement, along with agreements with other major cell phone companies, has brought stability to Qualcomm‘s future.

While it has yet to be fully monetized, Qualcomm has built a leading position in ADAS (Advance Driver-Assistance System) technology, more colloquially known as self-driving car technology. Given that self-driving cars will need to communicate through the cellular network, Qualcomm should be a key player.

At TMWG, we are patient investors. We built a 2.5% position in the stock in a series of purchases from November 2022 through September of 2023 at an average cost of US$118.59. We felt that the next cellphone cycle and further progress on the implementation of ADAS driving would drive the stock price higher. At the time, the stock was selling about 12 times the forecasted 2024 earnings and yielding 2.5%.

Figure 1.

Source: MWG, Refinitiv

In the fall of last year, the stock market got very excited about artificial intelligence (AI). Then, in October, Qualcomm announced the Snapdragon X Elite, a computing platform for Windows PCs with Copilot as Microsoft’s leading AI program. These chips offer substantially improved performance and power management over the market-leading Intel and AMD chips. Hewlett Packard has endorsed the chip and believes that, within a year, 50% of PCs will be based upon this chip. Dell, Lenovo, Acer and Asus are also issuing endorsements. This announcement brings QUALCOMM into the core of this huge market. Samsung has announced that AI will be available on its new high-end Galaxy Book 4 Edge Series powered by QUALCOMM’s X Elite.

With this news, Qualcomm’s stock has doubled over the last 8 months.
We have great confidence in an exciting future for QUALCOMM as they charge forward with dominance in the cellphone chip market and are now a leading product in the huge PC market. Self-driving cars are now being used in some U.S. cities (as of today, Waymo is available to the public!) and QUALCOMM will have another major market as ADAS becomes a commercial offering in vehicles.

This Focus Stock is written by CEO & CIO, Bruce Murray, CFA.

The purpose of this is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.

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