Qualcomm held their analyst day yesterday and the market seemed to yawn. The company gave out a range of updates and targets, extolled their products and design wins, and then the Street seems to have just shrugged. We understand that reaction, we have written a lot about Qualcomm’s lackluster growth prospects, but we want to consider it from Qualcomm’s point of view, or at least what they are currently presenting as their point of view.
Qualcomm’s stated strategy is that it wants to diversify its revenue, so that by the end of the decade half of their revenue comes from sources other than handsets. That is a sensible strategy, most of their semis peers have spent years diversifying away from reliance on a single product or end-market. Qualcomm is different in that they say they plan to do this entirely organically. They want to grow their way to diversification. Given that most M&A deals do not create value, there are sound reasons for not buying their way there.
Of course, taking this path means that diversification is going to take a long time. The company issued a series of revenue targets for 2029 – five years in the future. Automotive, PC, IoT – all now have five year growth goals. Five year forecasts seem like forever. Obviously many will point out that the Street is overly-obsessed with near term targets, which is fair, but even for corporate standards five years is a long time. We have to wonder how many of Qualcomm’s presenters yesterday will still be in the same role in five years. On top of that, the numbers themselves were not that exciting – $4 billion in PC revenue five years from now? It is easy to see why the Street was unimpressed.
In all of this, we are tempted to give the company of the benefit of the doubt. Their automotive strategy looks good, they have regained their product footing in mobile – these are important. That being said, there were a few things about the event that gave us pause.
First and foremost, they talked a lot about organic growth but they were in talks to acquire Intel – the least organic growth vector we can think of. And while we think that process is now formally finished, we have to wonder how committed the company is to organic growth if they were even willing to contemplate such a transaction.
Second, as Deutsche Bank’s Ross Seymore pointed out during Q&A the last time the company issued long term targets they did not pan out. Can we rely on these latest forecasts and what happens if we get to the end of five years and they have not reached those goals?We thought about that a lot when they talked about PCs. So much of their pitch on PCs centers around their NPU performance advantage. While technically impressive, they will be competing against AMD, Intel and eventually Nvidia in this market – so any performance advantage they have today is going to be fleeting. There will be a constant back and forth on who has the best NPU, and it is not even clear when (or if) consumers will care about NPUs and on-device AI performance. All of which is to say PCs are going to be competitive, and the company will have to fight brutally to reach those targets.
Finally, we have questions about how they chose their organic growth vectors. PCs are competitive, IoT and XR are fragmented, small markets. Why focus on those? The company has missed the boat on data center. And what about networking? Qualcomm has a sizable networking business that they have largely failed to capitalize on. Why did they choose to invest in IoT and not in networking – an area that is undergoing an inflection point they said was a major decision-making criteria. We understand that they do not have products there that can compete in today’s networking inflection point growth, but if they missed that, how do we gain confidence that they will make the right decisions for these new markets where they have only nascent presence today.
Overall, we are sympathetic to their desire to grow organically. There is a practicality to that kind of strategy. It’s just that if they exercised a little bit more imagination and energy they might be able to accomplish much more.
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