Name: What's Next for Qualcomm?
Uploaded: 2024-11-27T14:00:00Z
Duration: 12 min 48 s
Description: CEO Cristiano Amon has a plan to shrink Qualcomm’s reliance on phones and grow its role in AI, cars, and beyond. Investors are skeptical—should they be?

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CEO Cristiano Amon has a plan to shrink Qualcomm’s reliance on phones and grow its role in AI, cars, and beyond. Investors are skeptical—should they be?

https://m.wsj.net/video/20241127/99579ccd-a5c1-4acc-ac31-32469f7d8b1c/1/hls/manifest-hd-wifi.m3u8

What's Next for Qualcomm?

Nice to see you again, Cristiano.

Nice to see you too.

So you've been talking with folks for your investor day. Your company gets about three quarters of its revenue from phone handsets. Correct me if I'm wrong on that. And you have a plan to diversify that. So you can talk to me about that if you would.

Absolutely, look, when we had an investor day in 2021, that was kind of the year I became CEO, we realized that there was a lot of markets that could benefit from our technology. We have always been the most focused company in mobile, and that's why mobile is our core business. It's the majority of the revenue. But the technologies we have developed in our company, we realized it could be beneficial for industries that are going transformation like automotive. I think what's happening in personal computing, industrial, spatial computing. So we put at that time a plan to diversify and grow the company and we'll be executing on that plan. So what we did yesterday, which was a 2024 investor day to provide the scorecard, how have we done in that strategy? And I think we've done very well on automotive. I think we built probably the leading position in automotive across semi companies have a $45 billion pipeline. We are entering the PC now with probably the most powerful processor for SPC changes to AI or Microsoft Copilot+. We have build a position for virtual reality, augmented reality, mixed reality, as well as industrial. So what we did yesterday, we show investors, "Look at what we've done so far." And we put a timeline by 2029, we expect to have about $14 billion of known handset revenue. And when you look at the total IoT plus out of space about '22, I'm sorry, '22 known handset revenue, which gets the company as we get to the end of the deck to be 50-50. A fully diversified company. When mobile wire's still growing, it's gonna be about 50% of the total revenues.

I saw one Wall Street report, this is an analyst who has kind of a neutral rating on the company. He wrote, "We estimate $15 billion drag from Apple/Samsung share loss making it difficult to model top line growth over the next three years." He's talking, I believe about Apple and Samsung making more of their own chips. But meanwhile, the estimate show revenue growth for your whole company over the next year. So in the years ahead, is it your expectation that the new business that you're bringing in will more than offset the effect of some of these big phone companies making more chips in house?

I don't understand his Samsung comment because we are not losing share on Samsung. Actually, we're on the positive trajectory of share on Samsung, and I think we probably expect to historically have much higher share that we had in the past. We have been very clear that we expect that the Apple beyond the contract that we have will start coming off the model. We have been very clear. The story is we thought we'll have... We're being very transparent. Every time we have a contract with Apple, we had disclosed when it ends, we thought we'll start losing some of the Apple business in '23. That didn't happen. We thought with '24. That didn't happen. The latest contract we have, we expect to have about 20% of share in '26. And will that be the case? Will it be different? Will they renew? We don't know. But the reality is what we have done is as we have this plan of growth and diversification of the company, we actually more than replace the Apple revenue. So the company still have the ability to have annual growth as Apple comes off the model. And especially because of how successful the growth and diversification strategy on Aton IoT have been.

When I look at your stock chart this year, I say, "Well, that looks like a fine performance for the stock." Although the S&P 500 is up even more because it's being pulled higher by some of these artificial intelligence companies. Your stock goes for about 15, I saw it recently just right around 15 times forward earnings estimates. If you take a company like Nvidia, obviously a totally different company, trading for more than 50 times earnings because of the AI excitement. Do you think that investors have it right about your... Everybody's looking for AI stocks and your company is not the first name that comes to their mind. Do you think that investors are right in that assessment? Are you becoming more of an AI company?

Look, that's the right question and I think there are two separate topics, I think worth talking about it. The first topic, because a lot of our revenues, the majority of our revenues is mobile. We get mobile multiples because mobile market is an incredible market. It's one of the largest consumer electronic market in the world, but it doesn't grow because all of us have a phone. So it's more of a replacement rate market at this point. Maybe, maybe I know for sure that's the case, I just don't know the year. But we could see in one year, in two years, three years, we don't know. We're gonna see an AI upgrade cycle could create a supercycle on phones, but right now, phones grows with GDP and replacement rates. So I think people buy a new phone over a few years. So because mobile doesn't grow, there's a mobile multiple in the revenues. However, our outdoor revenue, our PC revenue, our industrial revenue, or mixed reality, and virtual reality revenue, all of those networking revenues, our marketers are growing. The more that we diversify the company, more we see a multiple expansion. That's the first part. So that's why it's so important for Qualcomm to increase the percentage of our revenues that are from growth markets because that's gonna rerate the company and change the company multiples. The second part of the question is a little bit more interesting. Look, there's this incredible growth of AI and right now, you see a lot of that happening in the data center, a lot of growth in the data center. But there's one thing, and we did talk about it in investor day, which is very interesting happened. If you think about ChatGPT 3.5 and when it launched, it was incredible, I think everybody saw that. It responds like a human. It has all this data. One year later, Llama from Meta had the same quality of 3.5, but Llama, it was few billion parameters, now hundreds of billions of parameters. You can run that on the phone, you can run that on a PC, you can run that on a dashboard of your car. So we are position ourselves to be the company that is going to run AI at the edge.

When I hear that phrase, edge computing, this is what we're talking about now. And as I know that-

Run in PC, cars, everything that has a human connected to it.

So explain to us if you would, the importance of this because, well, I think before the internet was a thing, right? In the early 1990s, we had to have these powerful computers because we wanted to run the latest version of Windows. And then for a while, it didn't kind of matter because all the hard thinking happened somewhere on the internet. It didn't happen on our local machine. And now all of a sudden with AI, everyone's talking about edge computing, suddenly our local machines need to be more powerful somehow for some reason. Why? What is that gonna do for us?

Look, I can talk to you about that all day, but I'm gonna try to summarize a few examples. First of all, when you run AI, it's the edge, and let me define edge. Edge is your phone, it's your glasses, it's your earbuds, it's your watch, it's your PC, it's your car, it's an industrial equipment, a robot, everything that is not the cloud. And that's where our silicon is going. We're now in every single market at the edge. When you run things at the edge, you have different use cases at the cloud. And the best way for me to describe that to you with AI is to give an examples. So let's start with a car. So one of the use cases we're working with many of our customers in the automotive industry, for example, you train a model on all the service database of a car model. You have a car model, the maker of the car knows everything about the car from all the dealerships, all the service records, you train a model on that. So you're driving your car, a light come up, you ask the car, the car tell you, "This is what happened. This is what you need to do. You can't drive, you cannot drive. You need to replace this part and then I'll be able to schedule that for you." That's a different use case that happens at the edge. Now let's talk about what Microsoft's doing. For example, they just announced a suite of features for the Copilot+ running on Qualcomm silicon. They have a feature which is called recall. The way recall works, everything you do on your computer and you're working on your computer, the machine is indexing everything. So then you can just tell the machine, I remember seeing a PowerPoint that had had the graph to talk about the Qualcomm diversification revenue. I'm gonna say this is the document you saw or I saw a video on YouTube that you taught me how to grow a beard. And it said, "This is the video that you saw."

I see you doing quite well growing that beard, by the way, go ahead.

I'm working on it. Yeah. So those are things which are personalized as you and it gets even more excited when you think about phones for example, because also one of the least understood capabilities of AI, we think about AI as you go in, you do a search or you have the know all, do all, I think model that you ask a question, but the reality is a little bit different. If you have an AI running on the device at the edge all the time, how you interact with the computer, the computer now understands human language. So it changes how you fundamentally think about what an application is. Like a great example that I often provide is like a banking app. We have this construct of apps in our head because of the 4G transition. But you could have an AI that knows the credentials for your bank and you just ask, "What's my balance? Future balance over the last five transactions? I took a photo of this bill, can you pay this bill for me?" Those are completely different evolution of AI. When you think of AI, redefining applications and being part of the user interface,

Are we in at some kind of inflection point here? What I mean is I have heard for many years about the internet of things and I can see the proliferation of chips all around me. Now you're talking about edge computing and the chips need to be more powerful and smarter. When do we come to the point where in investors are gonna be more excited about this? And when you think long term about Qualcomm and about your potential, how big of a company do you think this can be?

Look, I am convinced we have an inflection point right now and we outlined that this gen AI at the edge is a accelerator for all of our business, is an inflection point for smart glasses. Because you can wear glass that what you see the glass see, where you hear the glass hear and you have this AI, wearable AI assisting with you all the time. I believe phones are gonna fundamentally change. PC's already changing, the car has been a revolution, I think for a digital in the car. And I think what's gonna happen is Qualcomm is the company today that is running AI at the edge. We have developed technology, positioned ourselves. We've been expanding into all of those markets. So we think as AI go to the edge, this is the company that has one of the biggest opportunity to benefit from. And one of the things that we actually show in our investor day, we had some testimonials from Amazon, from Andy Jassy, testimony from Satya. And they both said, "You actually create the AI on the cloud and it gets deployed not only the cloud, but also at the edge." And I think that's the opportunity for Qualcomm.

Cristiano Amon, nice as always to speak with you. Thank you.

Thank you so much. I'm happy to be here.