This stock could better meet consumer needs as smartphones become increasingly popular.
Perhaps no stock has benefited more from artificial intelligence (AI) than NvidiaThe semiconductor company leading the development of AI chips posted triple-digit revenue and profit growth, with shares at one point up 1,000% from late 2022 lows.
While Nvidia is likely to dominate the AI chip space for the foreseeable future, investors seem to be hesitant about Nvidia stock due to its high valuation, and the increasing competition has investors wondering how much more the stock can grow in the near term. Therefore, investors are looking elsewhere and would be wise to shift their focus to Qualcomm (QCOM -2.88%).
Why Qualcomm
Amid the focus on AI servers, investors may have overlooked the importance of smartphones in harnessing the technology. Since most users have a smartphone nearby, it will likely be the most widely used AI interface. Furthermore, now that the 5G upgrade cycle has run its course, investors appear to have lost some interest in Qualcomm stock.
Fortunately, Qualcomm has been working to inspire its next cycle of AI upgrades. Qualcomm has developed its AI-capable Snapdragon 8 Gen 3 chip, which makes Apple to release its first iPhone with AI capabilities.
Allied Market Research estimates the AI chip market’s compound annual growth rate (CAGR) at 38% through 2032. Before the 5G upgrade cycle ran its course, revenue grew 39% annually in fiscal 2022, before declining 19% the following year. Assuming the industry has entered a revenue upgrade cycle, such growth could return.
Additionally, Qualcomm stays on top by continuing to patent technology that improves the technology in smartphone chipsets. This approach has prevented even top companies like Apple from becoming the market leader. Despite Apple expressing its intention to leave Qualcomm, Apple has now extended its patent license agreement until March 2027, an indication of Qualcomm’s indispensability.
Furthermore, should consumer tastes change, Qualcomm isn’t relying on smartphones to drive its future. That’s why it moved into the Internet of Things and automotive a few years ago. These two sectors accounted for 27% of Qualcomm’s revenue in the third quarter of fiscal 2024 (ended June 23). With revenue growth of 87% in automotive, Qualcomm appears to have an additional high-growth business.
How Qualcomm is doing overall
Signs are beginning to emerge that a new upgrade cycle is underway. Qualcomm’s $29 billion in revenue reported for the first nine months of fiscal 2024 rose less than 6% from year-ago levels. Still, if just fiscal Q3 is included, the growth rate jumps to 11%.
Qualcomm also slowed its spending growth to 2%. In addition, the company reported $768 million in investment income. That helped boost net income for the first three quarters of 2024 to more than $7.2 billion, up 26% year-over-year.
The good news is that even after a significant drop this spring due to an industry sell-off, Qualcomm shares are up nearly 55% over the past year.
Despite these gains, the price-to-earnings ratio is just 22. This gives Qualcomm a lower earnings multiple among the largest semiconductor companies. As the company’s revenue growth picks up again, this earnings multiple will likely look increasingly attractive.
Investing in Qualcomm Stock
With Nvidia’s stock price far outpacing its growth, other AI semiconductor stocks are starting to stand out. One that’s well-positioned for growth is likely Qualcomm.
Qualcomm has long been an innovator in the smartphone chipset space, and with the integration of AI, the market is likely to enter a new upgrade cycle that will strengthen Qualcomm for several more quarters. The continued innovation also extends to its other businesses, especially the automotive sector, which are emerging as new growth engines for the company.
Finally, the price-to-earnings ratio of 22 is very low given this impending growth. That should strengthen Qualcomm stock as customers and investors benefit from the shift to AI-powered smartphones.
Will Healy has positions in Qualcomm. The Motley Fool has positions in and recommends Apple, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.