The overall semiconductor market faced significant challenges due to a rapid cycle slowdown in recent years.

The biggest end markets for semiconductor producers, mobile phones and computers, have shown lackluster performance.

Mobile phone sales declined from 1.5 billion units in 2021 to 1.2 billion units in 2023, reflecting a sharp drop in demand.

Similarly, computer sales have followed a downward trend, with global computer shipments falling by approximately 16% in 2022 and another 14% in 2023.

As a result, the semiconductor industry lost over 30% of its total market cap in 2022, with a further decline in 2023 as demand weakened across key sectors.

However, this does not mean there were no opportunities in the space, as the industry is not solely reliant on consumer products.

Emerging areas such as artificial intelligence, automotive semiconductors, and data center infrastructure have shown resilience and growth potential, offering a silver lining amid the broader market downturn.

Qualcomm (QCOM) has long been a key supplier of modem and wireless technologies for top phone makers like Apple, Samsung, and Xiaomi.

In recent years, however, the company has faced challenges that raise questions about its future in smartphone components.

Apple, one of Qualcomm’s biggest customers, plans to stop relying on external modem suppliers in the coming years.

Existing agreements will keep Qualcomm chips in Apple phones through 2026, but by 2027, Apple may move this production entirely in-house.

Since Apple makes up a large chunk of Qualcomm’s smartphone-related business, losing such a partner could cause major shifts in Qualcomm’s position in mobile markets.

Yet market sentiment remains surprisingly positive despite these challenges. Part of the reason is Qualcomm’s steady push into areas outside of smartphones.

Qualcomm has spent years developing specialized chips, software platforms, and partnerships that extend its reach well beyond the cell phone space.

As smartphones near saturation in many regions, the company sees significant growth in connected cars, industrial applications, and smart devices that run advanced AI tasks locally.

Automotive is a standout example of this new direction. The industry’s shift toward software-defined vehicles presents a huge opening for companies that can handle everything from infotainment to driver-assistance features.

Qualcomm’s Snapdragon digital chassis has quickly found traction among automakers looking for a single platform that can power connectivity, dashboards, and emerging driver-assistance technologies.

By offering more complex solutions that bundle infotainment, telematics, and even aspects of autonomous driving into one system, the company hopes to become a leading name in the automotive supply chain.

Another prong of Qualcomm’s strategy is in IoT, which covers a wide range of connected products from industrial robots on factory floors to smart home appliances.

The company has introduced hardware platforms designed for tough, “industrial-grade” conditions, enabling real-time data processing and local AI tasks. 

This focus on edge computing where devices analyze and act on data without needing the cloud could become crucial as more businesses demand greater speed, reduced latency, and stronger security.

By tailoring its products for different IoT environments, Qualcomm wants to embed itself as the go-to provider for connectivity and intelligent processing.

On-device AI, in particular, is central to the company’s offerings. Many tech firms emphasize cloud-based AI, but Qualcomm is betting that people will increasingly want AI services right on their devices.

The idea is that complex tasks like voice recognition, real-time language translation, or advanced image processing should run on a phone or smart gadget itself, rather than sending data off to remote servers.

Qualcomm’s specialized Hexagon processors and Oryon CPU cores aim to deliver these capabilities efficiently without draining the battery or requiring a strong network connection.

This approach is especially attractive to smartphone makers looking for ways to differentiate premium devices and to industries where data security is a priority.

Of course, the possibility of Apple’s departure looms large in discussions about Qualcomm’s future.

If Apple successfully completes its internal modem project by 2027, Qualcomm’s handset revenue might take a serious hit.

Despite the potential risks, the market still is optimistic about the company.

We can also see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform return on assets will be 16%, around current levels.

Even with its moves into cars and IoT, the company still faces a huge risk. Losing Apple would mean a deep cut in revenue.

Right now, many investors seem to be overlooking how big this problem could become. 

They see the company’s solid cash flow and focus on new markets, but they may be giving too little weight to Apple’s exit plan.

Long term, this loss might be tough to fully replace. Investors would do well to keep that risk in mind before jumping in.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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