Qualcomm: Supply Agreement With Apple Doesn’t Alter Our Long-Term Valuation

We maintain our $140 fair value estimate for narrow-moat Qualcomm QCOM as the company announced a chip supply agreement with Apple that extends the timeline in which Qualcomm will be the primary 5G modem supplier into future iPhones. Shares are up about 4% on the news, but we still view Qualcomm as fundamentally undervalued.

We still anticipate that Apple will seek to deliver 5G modems in-house as soon as possible, and we model a deceleration in Qualcomm’s revenue from Apple over the next five years. In turn, our assumptions around Qualcomm’s long-term earnings power remain relatively unchanged, which is why we’re maintaining our fair value estimate. However, this announcement is undoubtedly a positive for Qualcomm (albeit not a massively material one), as this wind-down will likely be a couple of years later than previously anticipated by Qualcomm’s management team. We think the deal speaks to Qualcomm’s 5G design expertise, which we view as the source of the company’s narrow moat rating, as developing 5G modems might be a little bit harder for Apple than previously anticipated.

Qualcomm’s agreement suggests that it will supply 5G modems into Apple for smartphone launches in 2024, 2025, and 2026, which will translate to revenue for Qualcomm in fiscal 2025, 2026, and 2027, respectively. The only guidepost provided by management is that it expects to have only 20% chipset market share in the 2026 smartphone launch. We assume Qualcomm will have the vast majority of modem market share in the 2024 and 2025 iPhone lineup, although it’s possible that Apple may in fact introduce its internal 5G modem in a 2024 or 2025 model (say, a Pro model at the high end or perhaps the base model on the low end). Nonetheless, the announcement is still a net positive over most of the other wind-down scenarios we’ve been contemplating.