Analyst says smartphone market is developing 'slower pace'

Analyst says smartphone market is developing ‘slower pace’

Bob O’Donnell, President of TECHnalysis Research and Senior Analyst, discusses Qualcomm’s earnings, the growing growth in the smartphone market, implications for Apple, and the metaverse.

Video version

We continue to monitor Qualcomm stocks this morning after the company lowered its forecast for smartphone shipments and provided a more bleak sales forecast. For more information, let’s bring up the Chief Analyst for Technical Analysis Research, Bob O’Donnell. Bob, it’s great talking to you as always here. Good. When we come out of this quarter and kind of step back from what they have to say and really look at the underlying fundamentals of the business, but also the trends in the ongoing headwinds for them, what really sticks with you?

Bob O’Donnell: See, Qualcomm has been on the journey of transforming into a much broader company for several years now, really. But we’re really starting to see that play out. But the fact of the matter is that 56% of their revenue last quarter was for smartphones. That’s still a big part. So there was a lot of focus on their numbers and prospects.

But as with the PC market, we’re seeing the smartphone market take that dip after the pandemic. And it will be difficult. There’s a bunch of stock out there just as we’ve seen again with the PC guys. There are a lot of similarities in terms of what’s going on there on that front. But they have this Auto Analyst Day two weeks ago in New York talking about all the auto business they have. Of course, they offer a chipset for the new Meta VR headset.

They’re doing a number of areas because what they can do is take advantage of the technology they have, particularly on things like modems and radio frequencies and things that are really hard to do, Apple is learning, and apply that in a number of places. They’ve had this in cars for a long time in so-called telecommunication systems. And they’ve been driving it for a long time. Now, since they have more advanced processors that originally started in the smartphone market, they are entering that into the car market.

And as we move on to software-defined cars and more capabilities, Qualcomm says, look, you’ve been working with us for a long time anyway. We’re your natural gatekeepers to bring some of these advanced capabilities to the Digital Cockpit, to the Snapdragon Ride format that they have or the – excuse me – platform they have. So it’s a typical thing with semiconductors.

At the moment, the short term is very difficult for almost all of them. In the long run, I think those companies that have really diversified themselves have a really strong growth story. Qualcomm is one of them. AMD, of course, is a similar kind of situation. They just reported earlier this week as well.

Bob, when is this stock level correction, when does it ease and start to improve?

Bob O’Donnell: They said it would take several sides to get past that stock, Brian said on the call. And again, we hear relatively similar kinds of things to some other semi-old people. So I think this is just a reflection of the fact that a lot of people are, again, slowing down the pace of upgrading their smartphones. I mean, let’s think about it. We don’t see a lot of innovative smartphone designs. Everything is more gradual. We had a few big jumps with folds. But they are still a small part of the market. iPhones are evolving. But, again, a modest pace.

So there is no overwhelming feeling of having to own the latest great new smartphone. Now, there are still plenty of positives for 5G smartphones. This, of course, was a typical Qualcomm strength. So I think you’ll see them continue to develop this market. But it will only be at a slower pace. And people will have to get used to it in the short term, remembering that there are still those long term opportunities.

Bob, hey. It’s Julie here. I have to question the implications for Apple, right, because we keep getting these signs that smartphone sales are going to weaken. We get that – Qualcomm is just the latest. Today, Apple shares are down more than 3%. And I’m curious how long you think this pain will last in the smartphone market.

Bob O’Donnell: Hello Julia. I think it may take some time. I mean, I think we can draw, again, comparisons to the PC market, and it probably won’t go down as fast because PCs have grown more during the pandemic and therefore, unfortunately, are declining more. But smartphones have performed reasonably well during the pandemic. But, again, people say, OK, I’m good for a while. And the average ages we’ve seen are increasing over time. Now that’s really kind of a hit.

And when people have to make a decision, you know, if things get tough from a macro perspective, they’re like, look, my phone is fine. And it’s easier to fix it if you just want to replace the glass, of course, because people do it all the time. So I don’t feel like there’s that craving until we start seeing something completely different in the smartphone market. And again, we’ve seen folds like the Galaxy Fold and a few others. But it is still small.

Ultimately, I think Apple might do something like this. That will add some excitement to the market but I still think we are a few years away. But for the Apple challenges you mentioned, they bought the IP of the Intel modem. This is the chip that allows you to make connections with the cellular network. And it’s tough stuff. I mean, RF – radio frequencies are very tricky.

There are really only two companies in the world that do this well. It’s Qualcomm and MediaTek. Apple was planning to make its own modem. And they still are. They are only a year late now. And who knows if it will last longer? So here’s the upside to Qualcomm that no one expected. Too good for them. But it is offset, of course, by the fact that the market as a whole is still declining.

If the metaverse takes off, is Qualcomm the net beneficiary?

Bob O’Donnell: Yes it is. that it. I mean, because there is — when we think at least the near term — I mean, the longer term we’ll see. But in the near term, they have the chip that powers the headphones. Again, there are a couple of other competitors. But Qualcomm is far more advanced in this regard. But I mean, look at it now even. I mean, they put that into their revenue from the Internet of Things. It still represents a small portion of Qualcomm’s revenue. So even if it explodes, it becomes a reasonable percentage of Qualcomm’s revenue, but nothing compared to smartphones, which, to me, is just another example and a reason why I think the metaverse as some people have described it is far-fetched.

Bob O’Donnell, Chief Principal Analyst at TECHnalysis Research. It’s always good to see you. We will talk to you soon.

Bob O’Donnell: Thanks. I appreciate you hosting me.

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