Qualcomm's Diversified Growth and Data Center Expansion Reinforce Buy Thesis

What happened

The market has been overly pessimistic about Qualcomm's diversified growth across smart devices, automotive, and IoT, as highlighted in a recent bullish article. Qualcomm delivered outsized non-Apple handset revenue growth in FY2025 and guided for low teens percentage growth in FQ1'26, with potential data center monetization from the Alphawave acquisition targeting AI inference SoCs by 2026. DeepValue's report supports this with record QCT revenue, a 72% EBT margin in QTL licensing, and strong capital returns of $8.8 billion in buybacks and $3.8 billion in dividends. However, critical risks persist, including slower mmWave adoption, execution on Windows-on-ARM PC and automotive pipeline conversions, and a one-time $5.7 billion tax valuation allowance that depressed GAAP results. Overall, the alignment of new growth prospects with existing strengths underscores Qualcomm's undervaluation at 54% below the DCF base estimate.

Implication

Qualcomm's undervaluation relative to its DCF base offers a significant margin of safety for investors seeking exposure to semiconductor growth, with the stock trading 54% below intrinsic value. Diversification into automotive, IoT, and data center markets reduces reliance on cyclical handset demand, supported by a robust $45 billion design-win pipeline and the Alphawave acquisition for AI inference. Strong cash flow generation and capital returns provide downside protection, with an interest coverage of 18.6x and net debt to EBITDA of 0.62x ensuring financial stability. However, investors must vigilantly track the Windows-on-ARM PC ramp, automotive pipeline conversion, and QTL profitability to avoid potential setbacks that could derail the thesis. The expected normalization of the effective tax rate to 13-14% post-valuation allowance further enhances earnings potential, making disciplined monitoring essential for capitalizing on upside while managing risks.

Thesis delta

The new article reinforces the existing BUY thesis by emphasizing Qualcomm's growth in non-Apple handset segments and data center opportunities through Alphawave, aligning with DeepValue's focus on diversification. No material shift is warranted, but it heightens confidence in the near-term growth trajectory and underscores the need for execution on key catalysts like PC and automotive ramps.