Qualcomm's AI Success Overshadowed by Patent Licensing Woes as Stock Dips

Qualcomm, the world's leading smartphone chip vendor, recently announced earnings that surpassed analysts' expectations, driven primarily by the burgeoning demand for smartphones equipped with artificial intelligence capabilities. Despite this, Qualcomm's stock declined in after-hours trading, reflecting concerns over a stagnant outlook for its lucrative patent licensing business due to the expiration of a key agreement with Huawei.

The company projected its second-quarter revenue to range between $10.3 billion to $11.2 billion, above the average analyst estimate of $10.4 billion. Excluding certain items, earnings per share are expected to be between $2.70 and $2.90, which exceeds the market consensus of $2.69.

Although global smartphone market growth has decelerated, Qualcomm's position as a leading supplier for high-end devices like Samsung's Galaxy series continues to bolster its financial performance. The company's strategic expansion into non-core markets, such as automotive and personal computing, has further contributed to revenue growth, notably through collaborations with Microsoft to produce laptops and PCs based on Qualcomm's chips.

For the first quarter, Qualcomm reported adjusted earnings per share of $3.41, with revenue growing 17% year-over-year to $11.7 billion, surpassing analyst expectations of $2.97 per share and $10.9 billion in revenue. Specifically, sales related to mobile phones increased 13% to $7.57 billion, outpacing market expectations of $7 billion.

CEO Cristiano Amon highlighted robust demand for premium smartphones in China, alongside partnerships like Samsung's exclusive use of Qualcomm processors in its latest Galaxy devices, which have both fueled earnings. Qualcomm anticipates a 10% increase in mobile business revenue for 2025.

A further point of interest is Qualcomm's involvement with DeepSeek R1, a fast-developing AI model that can be operated efficiently on Qualcomm's chips without cloud reliance. Amon remarked, "AI models like DeepSeek R1 are evolving rapidly, becoming smaller, more powerful, and more efficient, capable of running directly on devices."

Despite Apple's efforts to develop its own modem chips, Qualcomm has maintained its business relationship, providing lasting yet eventually diminishing revenue streams. To counteract potential losses from Apple, Qualcomm has secured a significant new agreement with Samsung for flagship phones, underscoring its competitive edge.

Qualcomm's patent licensing revenue remains a crucial profit source, contributing $1.54 billion in the first quarter, aligning with analyst projections. Regardless of chip usage, smartphone manufacturers are required to pay Qualcomm for pertinent patent fees, ensuring steady income.

However, company executives warned during an analyst call of no expected growth in patent licensing revenue this year due to the expiration of an agreement with Huawei. Although Qualcomm ceased selling chips to Huawei last year, it retained a licensing arrangement, previously estimated to add $0.10 to $0.15 to earnings per share.

Following these announcements, Qualcomm’s stock fell over 4% in after-hours trading. While investors have high expectations for AI-related gains and despite the company's 14% stock rise, significantly outpacing the S&P 500's approximate 3% increase this year, stagnant patent licensing growth continues to be a source of investor caution.

Summit Insights analyst Kinngai Chan suggests, "The market's expectations for Qualcomm remain high, warranted by the company’s potential in the expanding PC client market and increased smartphone market share, particularly within the premium segment."