Qualcomm's first auto investor day offers signs the industry is embracing its tech platform

Published Thu, Sep 22 20226:40 PM EDTUpdated Thu, Sep 22 20226:48 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Chip maker Qualcomm (QCOM) shined a light on its automotive strategy during an investor day Thursday, detailing new partnerships and offering fresh insights into projected revenue at its auto division. Club holding Qualcomm said its automotive "design-win pipeline" now stands at $30 billion, up from roughly $19 billion when it reported third-quarter results in late July . The estimated figure stems from Qualcomm's deals with auto companies that it expects to translate into sales in future years. It is not reflected on the company's balance sheet yet. The company also disclosed an agreement with Mercedes-Benz to bring its cloud-connected auto platform to the German carmaker's upcoming vehicles starting in 2023, as well as a deal with IBM software subsidiary Red Hat. "The automotive companies know they have to become a technology company. The car is going to be a connected computer on wheels," Qualcomm CEO Cristiano Amon told CNBC earlier Thursday. "Companies know … they need to move fast to this new automotive industry, and that's why partnerships with companies like Qualcomm become very important," he said. Bottom line Qualcomm delivered with its first-ever automotive investor day. Its booming auto pipeline and additional tie-ups with vehicle original equipment manufacturers (OEMs) offer more evidence that the industry is embracing its automotive platform. Looking forward, we think that as Qualcomm proves its become more than a handset company, investors will ascribe more value to its future earnings. That, in turn, would translate into a higher multiple for its stock. It currently trades at less than 10 times forward earnings, well below its five-year average of 15.8, according to FactSet. More Club thoughts Thursday's auto event has been circled on our calendars because it goes to the heart of our investment thesis in the company: revenue diversification. Qualcomm is a longtime leader in smartphone chips and other wireless communication technology, but has started to more aggressively expand into other industries like automotive. Although Qualcomm modems have enabled cellular connectivity in vehicles for roughly two decades, this current chapter is about developing a connected-vehicle platform. It's a small contributor to Qualcomm's top line right now, but represents a key ingredient to its growth recipe in the coming years. We are believers. We think Qualcomm can successfully diversify, leaning on its mobile-computing DNA to develop the digital support framework that tech-heavy modern vehicles require. Qualcomm's overall automotive platform is called the Snapdragon Digital Chassis. It carries the Snapdragon brand given to the company's mobile processors and uses the same word — chassis — given to a vehicle's physical support frame. In this case, it's silicon and software taking the place of steel or aluminum. In addition to cellular connectivity, infotainment screens and the vehicle's cockpit, other features include advanced-driving assistance systems (ADAS). Qualcomm has existing deals with automakers involving its ADAS infrastructure, known as the Snapdragon Ride Platform, including with BMW and General Motors (GM). Nonetheless, the market has not been kind to Qualcomm's stock price this year, sending it down by more than 30%, as investors jumped ship over fears of a smartphone slowdown and higher interest rates. We started buying QCOM in February and have since built up our position to 850 shares, trying to capitalize on weakness as believers in the company's multiyear diversification story. It has about a 3.83% weighting in our portfolio . While it's not fun to see a stock you own fall out of favor, as long as your rationale remains intact, long-term investors can view the selling opportunistically. That's how we approached the decision to purchase 100 Qualcomm shares on Sept. 9 . The market gave us a chance to buy more of something we like at a discount. Qualcomm's stock closed down 0.75% on Thursday, at $123.68 a share. Details on financials Qualcomm CFO Akash Palkhiwala offered some auto-focused financial comments during the investor day. Some quick background: Qualcomm reports results in two primary segments, Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL). QCT is the semiconductor business most think of when considering Qualcomm's operations and generate the bulk of the company's total sales, while QTL grants licenses to use portions of Qualcomm's intellectual property portfolio. Here is a quick summary of Palkhiwala's comments. The company expects QCT automotive revenue -- auto-related sales from its traditional chip business -- to be $4 billion in fiscal 2026 and $9 billion in fiscal 2031, compared with an estimated $1.3 billion in fiscal 2022. Palkhiwala said management has "exceptional" visibility into future revenue due to how its deals with OEMs are structured. "Over the next four years, 90% of our cumulative revenue forecast ... is covered under existing design wins," he said. (Qualcomm's total revenue for fiscal 2021 was $35.57 billion.) Palkhiwala also indicated that Qualcomm anticipates its ADAS offering to meaningfully scale in fiscal 2026. Fiscal 2022, on the other hand, represented a major ramp up in revenue from its Snapdragon Cockpit Platforms, he said, noting there were 20 new vehicle launches this year. The executive tried to quantify Qualcomm's potential revenue on a per-vehicle basis by the year 2030, saying that it should come in around $200 for a lower-tier car and up to $3,000 for high-tier vehicles. "You should think of cars going forward, the mix will continue to shift toward the high end," he said. "The opportunity will keep expanding as we go forward." An important thing to keep in mind with Qualcomm's design-win pipeline, Palkhiwala said, is that recurring services and cloud revenue is "upside to those numbers." The company sees "tremendous opportunity" there, but it is not embedded in the targets for now, he said. For now, the design-win pipeline mostly consists of expected revenue that existing chipsets and software will provide. (Jim Cramer's Charitable Trust is long QCOM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked a