Qualcomm & Samsung – Holding the line.

Qualcomm FQ3 2020 – Huawei joins the fold.

• Qualcomm reported good FQ3 2020 results as its original outlook has proved to be too pessimistic and 5G in China has picked up much more quickly than expected.
• FQ3 2020 revenues / EPS were $4.89bn / $0.74 which was broadly in line with forecasts of $4.80bn / $0.79 but it was the news and the guidance where the story was to be found.
• Qualcomm had previously guided for a 30% YoY decline in the smartphone market in Q2 2020 but the market declined by just 20% thanks to a pick-up in developed markets as lockdowns ended and Chinese 5G.
• 5G enabled handset now makes up more than 50% of all smartphone shipments in China which has helped Qualcomm given its prowess in this area.
• Qualcomm also announced a settlement with Huawei which will result in some back-royalties being paid in FQ4 and means that for the first time in a while every major handset vendor now has a multi-year agreement for Qualcomm’s IP.
• Qualcomm’s front end (electronics that sit between the modem and the antenna) have also been very well received with almost all its 5G design winds also using its front end as well as some that are not using a Qualcomm modem.
• As more and more radio bands are used it becomes increasingly difficult to create the electronics and the antennas that can handle all of the different frequencies.
• Qualcomm has also done a good job in this area which may help it to maintain market share in a market where more vendors want to make their own silicon.
• As a result of market strength, FQ4 guidance was better than expected leading Qualcomm to forecast that the smartphone market will fall by around 10% in 2020 compared to 2019.
• This is in line with TSMC’s expectations abut better than RFM forecasts where a drop of 10-20% is forecast for the year.
• Should there be a significant increase in infections as winter sets in, there may be downside to both Qualcomm and TSMC’s forecasts but at the moment these numbers look about right.

Samsung Q2 2020 – Relatively cheap again.

• Samsung gave more details on its Q2 2020 performance which confirmed that its better than expected performance has been almost entirely driven by semiconductors.
• Mobile handset and infrastructure (tiny) revenues fell by 18% YoY and 21% QoQ while Semiconductor revenues grew by 13% YoY and 3% QoQ.
• Despite the fall in mobile revenues, Samsung managed to hold margins steady at 9.2% underlining my long-held view that when it comes to dealing with adversity, Samsung is a world class operation.
• Samsung remains the only company that I have seen successfully pull out of the mobile handset death spiral and I think that it will continue to execute well during the course of the pandemic.
• Samsung is expecting a gradual recovery in mobile during H2 2020 but that the uncertainty will continue while Semiconductors will continue to do well although there is some uncertainty around how much inventory its customers have built up.
• Hence, I think that the outlook for Samsung remains uncertain, but I am pretty sure that it will pull through without incurring any real lasting damage.
• The most interesting thing about Samsung relative to the other global technology giants is its valuation.
• Samsung is trading on 2020 PER of 15.9x which is almost half of the valuation being given to Apple (30.5x) despite the fact that Samsung is offering higher growth.
• In fiscal 2021 consensus has Apple’s earning recovering by 25% YoY while Samsung is offering 42%.
• There has always been a discount applied to Samsung for its location, but this is taking this discount way too far.
• Hence, I would be selling Apple and buying Samsung as a much better way to gain exposure to the 5G upgrade cycle and the smartphone market in general.