Qualcomm (QCOM): Strong Quarter Overshadowed by China Exposure and Licensing Concerns

Qualcomm delivered a solid first-quarter earnings report, comfortably surpassing earnings per share and revenue expectations while providing an upbeat outlook for the second quarter. However, despite these strong results, the stock declined sharply as investors reacted to concerns over the company’s licensing business and its significant exposure to China.

While Qualcomm has been diversifying its revenue streams in recent years, the company still derives approximately 45 percent of its total business from China. This dependence creates uncertainty in an environment of escalating U.S.-China trade tensions, particularly as Chinese competitors look to reduce reliance on U.S. chipmakers. Additionally, Qualcomm’s high-margin licensing business, which contributes disproportionately to its earnings before tax, showed signs of weakness in the latest quarter.

Licensing Business Faces Headwinds

The licensing segment, known as Qualcomm Technology Licensing (QTL), only accounts for about 15 percent of total company revenue but is a critical driver of profitability. With estimated earnings before tax margins of 75 percent—far higher than the roughly 32 percent margins in Qualcomm’s core semiconductor business—QTL generates a sizable portion of overall earnings.

In the first quarter, QTL revenue rose 5 percent year-over-year to 1.54 billion dollars but fell short of analyst expectations. More concerning was the company’s second-quarter guidance, which projected QTL revenue in the range of 1.25 to 1.45 billion dollars, representing just 2 percent growth at the midpoint. This slowdown signals potential challenges ahead for the licensing segment.

A key factor behind the weakness is Qualcomm’s inability to generate revenue from Huawei, which has been impacted by U.S. trade restrictions. While Huawei was once a major Qualcomm customer, the ongoing geopolitical tensions between the U.S. and China have disrupted this business relationship.

The larger concern, however, is that additional Chinese smartphone manufacturers could follow suit, either due to government pressure or in pursuit of homegrown alternatives.

China Exposure Remains a Major Risk

Despite its efforts to diversify, Qualcomm remains heavily reliant on China, which accounted for nearly half of its total revenue in the latest quarter. This exposure poses significant risks as trade relations between the U.S. and China remain strained.

For now, Qualcomm’s technological edge in premium Android smartphones has helped the company maintain its competitive position. Its Snapdragon 8 Elite chipsets continue to power high-end Android handsets, driving strong demand in China’s premium smartphone segment. However, the long-term risk remains that Chinese manufacturers will develop their own advanced chipsets, eroding Qualcomm’s market share over time.

Additionally, Qualcomm faces potential sales declines from another major customer—Apple. Currently, Apple represents about 10 percent of Qualcomm’s total revenue, but the iPhone maker is moving toward developing its own in-house chips.

By the end of 2026, Apple is expected to phase out nearly all of its reliance on Qualcomm, a headwind that is already factored into investor sentiment but remains a significant longer-term challenge.

Handset Business Remains Strong but Growth Expected to Slow

Despite the macroeconomic challenges, Qualcomm’s handset business remains its largest revenue driver, accounting for approximately 65 percent of total sales.

In the first quarter, handset revenue increased by 13 percent year-over-year to 7.6 billion dollars, following a 12 percent increase in the previous quarter. The growth was fueled by higher volumes and increased chipset content in premium Android devices.

However, Qualcomm expects some deceleration in the second quarter, guiding for handset revenue growth of around 10 percent. While the premium smartphone market continues to perform well, industry-wide pricing pressure and macroeconomic uncertainty could weigh on demand.

Internet of Things and Automotive Provide Growth Opportunities

Beyond handsets, Qualcomm is seeing significant momentum in its Internet of Things (IoT) and automotive businesses, which are becoming increasingly important growth drivers.

The IoT segment experienced a resurgence in the first quarter, with revenue surging 36 percent year-over-year to 1.5 billion dollars. This followed a 22 percent gain in the fourth quarter, marking a sharp turnaround after three consecutive quarters of year-over-year declines.

The rebound has been fueled by Qualcomm’s entry into the PC and laptop markets with its new Snapdragon X Plus 8-core platform, which is being used in AI-powered PCs featuring Copilot+.

Meanwhile, the automotive business delivered even stronger growth, with revenue soaring 61 percent year-over-year. As automakers integrate more advanced computing and connectivity features into vehicles, Qualcomm is well-positioned to benefit from increased demand for AI-powered chips and telematics solutions.

Looking Ahead: Managing Risks While Leveraging Growth Markets

While Qualcomm’s latest earnings report highlighted strength in multiple segments, investors remain focused on the risks associated with its licensing business and its reliance on China. The possibility of losing additional contracts with Chinese manufacturers, combined with a longer-term decline in Apple-related sales, presents significant uncertainties.

That said, Qualcomm’s growth in IoT, automotive, and premium Android chipsets provides reasons for optimism. If the company can successfully expand in these areas while managing geopolitical risks, it has the potential to mitigate some of the headwinds affecting its licensing business.

In the near term, investors will be closely watching how Qualcomm navigates its QTL challenges and whether its diversification efforts can offset slowing handset revenue growth. If the company continues to execute well in high-growth segments like IoT and automotive, it may be able to stabilize investor sentiment despite the China-related concerns.

For long-term investors, Qualcomm remains a dominant player in the semiconductor space, but managing geopolitical risks and licensing headwinds will be critical in determining its future trajectory.