Billions of additional devices are going to connect to the cloud, and that’s just one trend driving tech giant Qualcomm (QCOM -2.14%). The company is a leader in making the chips that connect devices to the cloud. Motley Fool senior analyst Jason Moser sat down with Qualcomm Chief Financial Officer Akash Palkhiwala to discuss:
- The growing opportunities in artificial intelligence and cloud-connected cars.
- How personal computers are evolving.
- One “almost unlimited” market opportunity.
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This video was recorded on July 10, 2022.
Akash Palkhiwala: There is a tremendous opportunity because it really asks for everything that Qualcomm is good at and where we have a competitive advantage. This shows up in our design win pipeline. If you look at all the leading companies that are pursuing the metaverse opportunity and making devices for it, all of them really, most of them are using Qualcomm chips, and so that’s a tremendous opportunity for us, we’re at the front end of it, probably a 10-year curve.
Chris Hill: I’m Chris Hill, and that’s Akash Palkhiwala, chief financial officer of Qualcomm, the multinational tech giant with a market cap north of $140 billion. Qualcomm makes the chips that allow for a 5G transformation, artificial intelligence, and more connected devices. Recently, Jason Moser talked with Palkhiwala about the trends that could drive Qualcomm’s growth and building the infrastructure for the next version of the internet.
Jason Moser: Hi, folks. Thanks for joining us today. I’m Jason Moser and I have the good fortune today to be joined by the CFO of a very popular recommendation in our Foolish universe here. This is Mr. Akash Palkhiwala with Qualcomm. He’s been the CFO since 2019, with the company since 2001. Mr. Palkhiwala, thanks so much for joining us today.
Akash Palkhiwala: Thank you, Jason. Thanks for having me here.
Jason Moser: Well, this is especially true for me because I’ve actually recommended Qualcomm in both of my services here at the Fool so I’m very thrilled to be able to have the chance to talk with you. I wanted to start with the big-picture question in regard to the chip space. I think the chip space has this reputation for historically being very cyclical, new tech comes out, over time we get saturated with it, growth stalls, and then the next wave of tech comes out. That cycle starts over again. We’ve seen that play out here over the last several decades really it feels like, but given the role that tech plays in our lives today, given this growing notion of persistent connectivity, and it feels like we’re only headed more in that direction. It’s starting to feel like as an investor at least, certainly as a consumer, but as an investor it feels like that cyclicality may be tempering a bit. We’re moving away from these chip companies maybe being as cyclical in nature. Is that a fair view?
Akash Palkhiwala: Yeah, that’s a great question, Jason. First of all, thanks for supporting us and recommending Qualcomm stock. If you think about the chip industry overall, there’s two ways of looking at it. The shorter term, there is always some variants that you’ll see in the market. It’s either driven by macroeconomic conditions or supply constraints and issues like that. I think the right way of looking at the industry is really stepping back and having a longer-term view of the trends that are happening overall in technology and how those trends impact the chip industry. If you think about the broad trend of everything connecting to the cloud, if you think about the metaverse, if you think about the transformation of the automotive, the coming together of handsets and PCs into a consistent experience across those devices.
Overall digital transformation of industries and enterprises that are happening as well. Each of these trends, what it results in is more cloud-connected devices. If you think about today, the phone is the most cloud-connected device. When we move forward, we’re going to imagine a lot more devices that are going to be connected to the cloud. Each of these devices need the following capabilities: They need to have Wi-Fi or 5G connectivity, they need to have low-power processing at the edge, and they need to have AI and machine learning. All these technologies extremely important, something that Qualcomm does very well on the phone, and we have this tremendous opportunity to bring those technologies into other areas, into auto and IoT. I’m sure we’ll talk about that in more detail later in the conversation.
But when you think about the implication of this to the industry overall, we’re in a place where we’re going to see for a very long period of time increased use of chipsets, increased demand of overall chips because of increasing connected devices, and also more silicon content because you’re doing more things with the chip. These are all opportunities for the industry overall, you can see that we are in a place where we could have pretty sustained growth as an industry for a long period of time. That’s an exciting place for Qualcomm to be as a participant in the industry, but then also as a company that has the best technology portfolio in the industry.
Jason Moser: You used the word there earlier that I think, really an important word here, that is trends. The word trends really stands out because it feels like we are at a moment where so many different trends are coming into play at once. I mean, this is all really been enabled by technology, you’ve got 5G that’s enabling things like Internet of Things, artificial intelligence, machine learning, augmented virtual reality, autonomous driving, and you go on and on and on. It feels like there’s so many trends coming into play all at once here. It’s a very exciting time as a consumer. As someone who’s in the middle of that with Qualcomm, what’s the technology at Qualcomm that you are working on today that you’re most excited about? Any of these trends stand out to you as particularly exceptional opportunities?
Akash Palkhiwala: Jason, when we think about these trends, we think of the combination of all these trends because they all come together, in some ways they’re all interconnected. Our strategy to address it is to really become the chipset provider for the connected intelligent edge. As everything connects to the cloud, we can be the chipset provider for things on the edge that wants to connect to the cloud. I mean, I think generally from an investor perspective that is a very strong buy-in on the fact that cloud is a big driver of growth going forward, but for everything to connect to the cloud, we’re going to need chips from people like Qualcomm, and we think we’re in a great place to be able to do that. I’m going back to your question on the technology portfolio and what we’re excited about.
First thing I would say is we have a very broad set of technologies at Qualcomm, the advantage of being in the cellphone industry, in the mobile phone industry is you have to do a lot of things well, you have to do the 5G, Wi-Fi, Bluetooth, GPS and then you do a bunch of processing technologies, CPU, GPU, AI, display, audio, video, security. Because of having been on the phone for this long, what we’ve created is just an incredible portfolio of technologies that is relevant to the connected intelligent edge that I just talked about. The one technology that maybe I’ll highlight because I feel like there’s not a great understanding of how strong Qualcomm is in this technology, and also the opportunity for us going forward is artificial intelligence.
Our legacy in the phone industry, we’ve been working on AI for about 10 years. We’re on our seventh generation of products using AI cores. Largely, AI has just an incredible amount of use cases across industries, and it just doesn’t apply to one area or one set of devices, not just to consumers, but to enterprises, but to industrial applications, and also to automotive. All these areas, we have the ability to offer our solution. If you think about what we have in AI is just a very low-power way of connecting to the cloud and doing processing on the device before the information is sent to the Cloud. Then this really optimizes what you send to the cloud. Let me just maybe pick a couple use cases that make it more tangible for the audience. The first one is if you look at the camera in the phone, so when you take a picture with AI, you can make a decision that the background has sky in it.
As a result, you could make the color bluer. You could also use AI to use the pixels to focus the photograph on the face of a person rather than the background. There’s just a lot of techniques that you can use within AI to make a camera better. Similarly, if you think about automotive, given where how that industry is transforming and the use of ADAS driver-assistance in driving, there’s tremendous applicability of AI that should apply to that industry as well. That’s another area. The third I would say is manufacturing. You could have a camera in a manufacturing line that can look at all the parts that are going through and quickly find defects using AI technology that you couldn’t do in the past. These are just great examples of where Qualcomm’s AI solution becomes relevant on the connected intelligent edge.
Jason Moser: You mentioned automotive there and I think that’s a market that, I think some people maybe have a little bit of a tough time grasping exactly how technology can and ultimately will shape the automotive landscape. It’s amazing to think about it. In a recent call, you said that diversification is the top priority for the company as evidenced by the increasing design win pipeline in automotive and accelerating revenue growth in IoT or Internet of Things. Digging into that IoT and automotive opportunity, let’s start with automotive. What are some of the wins or some of the opportunities that you’re really excited about these days in the automotive realm?
Akash Palkhiwala: Yes, if you think about the automotive industry and where it’s at, it’s going through obviously a tremendous transformation by itself. Then there are two big pillars of this transformation: there’s electrification happening, and then there is a journey toward autonomous driving with new features being added over the years and eventually, you end up at much more often autonomous car than you have today. Both those trends just create tremendous use cases for our technologies. The strategy we have in automotive is we take all the solutions we’ve developed for phones and we bring it to bear within automotive, and we call it the digital chassis. The digital chassis is something that sits on top of the physical chassis in the car.
What it’s going to provide to the car is the following set of solutions, first is cloud connectivity. Whether you want to do it through Wi-Fi, through 5G, we’ll be the chip provider that allows you to do that. The second is transforming the consumer’s experience inside the car. When you think about the digital cockpit, when you think about the infotainment center in the car, we can transform that experience by providing a lot better user interface using the technologies we have developed within phones. The third area is ADAS technologies, and this is basically using our chip, using our expertise in AI and making it available such that you have a set of chips that can take the input from all the sensors, camera, radar, lidar, and others, and help make decisions to make the driving better for the car. Then finally, I’d say we acquired a company called Arriver, which gives us software for ADAS.
There’s a tremendous opportunity for us not to just deliver hardware chipset solutions, which is something we’ve been great at for a long period of time, but really offer value-add software services on top of it to really enhance the solution we have. A lot of ways in which we can bring our technology to bear in automotive, and we’re just at the beginning of it. If you look at our design win pipeline, we’ve announced that we have greater than 16 million in design wins at this point. But as we look forward, we just see this tremendous opportunity to do a lot more. The partnership we have with the leading OEMs in the world is just what gives us confidence.
Jason Moser: What about IoT, Internet of Things, I love how on your earnings reports, you break out the IoT, the automotive, the radio opportunity to go with the handsets. IoT is a huge space. It’s such a big concept. Everything connected to everything essentially and some of it makes sense, some of it you wonder, is it really value add? Where do you feel like the big opportunities are for Internet of Things as far as Qualcomm is concerned?
Akash Palkhiwala: I think some of this conversation Jason really goes back to where we started this discussion. There is just billions, hundreds of billions of devices that are going to get connected to the cloud, and we have the opportunity to be the chip provider. Let me break it down a bit. If you think about consumer IoT, there are devices that are not a phone but look like a phone. Think about your tablet. Think about your PC. Think about XR or metaverse devices. Wearable devices, hearable devices, all these things which rotate around the phone experience. There is tremendous opportunity for us to take our phone technologies and be the chip supplier of choice for all these areas. Maybe I’ll pick metaverse to give an example of a little more detail. We think of XR or metaverse as potentially the next generation of personal computing devices.
You had the PC, then you had the phone, and we think the third device could be something that you’re wearing on your face like you and I are wearing at this point. That’s an opportunity where the chip supplier is going to have to solve in a very small area, even smaller than the phone a lot of different technologies. There’s cloud connectivity that is processing camera, AI. All these technologies need to be on something we wear on our face. There is a tremendous opportunities because it really asks for everything that Qualcomm is good at and where we have a competitive advantage. This shows up in our design win pipeline. If you look at all the leading companies that are pursuing the metaverse opportunity and making devices for it, all of them really, most of them are using Qualcomm chips.
That’s a tremendous opportunity for us, and we’re at the front end of it, probably a 10-year curve. I’d say that’s one of the ways to play the metaverse market is to make a bet on Qualcomm. So that’s one example. The second is the transformation of the PC. Over COVID what has happened is PC has gone back from being a productivity device to a communication device again. You’re doing video calls on the PC, you’re doing messaging, a lot more messaging on the PC. Always connecting to the cloud rather than working on the device itself. With the change in that experience, there’s an opportunity for us to really become the chip supplier for the next generation of personal computing devices on the PC. We’re very excited about that great partnership with Microsoft, and so that’s something that we’re looking forward to as well.
That’s just a set — a set of examples for consumer IoT. Let me quickly address edge networking IoT. What we call edge networking is really a set of technologies that are used in the home to connect to the cloud. Your Wi-Fi access points that Qualcomm has been the largest chip supplier. That industry is being transformed very significantly, the demand on Wi-Fi in home and enterprises have gone up by a lot. It’s not just about doing your work email at home, now it’s obviously video calls. You’re downloading, you’re streaming movies, you’re streaming gaming. All these creates a lot more demand off of the Wi-Fi network and that allows us to increase our silicon content. The second is using 5G as a broadband technology into the home.
That’s something that in emerging markets, there’s tremendous opportunity for us to be doing that, even in developed markets I’m sure you’ve seen advertisements from Verizon and T-Mobile, great partners of ours, offering 5G devices as a way to get broadband services into the home. That’s secondary, I would say as edge networking. Then finally it’s industrial. This is the area we are most excited about, because the market in front of us is almost unlimited. The challenge for us is, how do we get access to that market much more so than do we have the right products for the market. We have all the right technologies and really maybe I’ll make it tangible by giving a couple of examples.
If you think about retail, the retailers are looking to transform the experience inside the store. You have people working in the store walking around with a handheld device that uses our chip. Retailers are looking to change the labels, the price labels in the store from physical to digital and then connected to the cloud. That’s an opportunity for us. Cameras within the store to help make decisions on stocking shelves are evaluating traffic within the store. That’s an opportunity for us as well. Just tremendous opportunity within retail, that’s just one vertical. Similarly, you can think of all the other verticals: transportation, healthcare, utilities, manufacturing, distribution. All these areas have a new set of use cases as things connect to the cloud. All of those are opportunities for us.
Jason Moser: You mentioned the M word just a few moments ago — metaverse. It’s been a big point of focus, I think for a lot of folks here recently for understandable reasons. Some are fully bought in, some are still skeptical. What do you think about the metaverse opportunity, is it as big as we read about these days? I guess what I really mean is going forward and I heard someone interviewed one time. He described the metaverse as ultimately the 3D internet, which that at least made me, that I felt like that was the simplest and easiest way to understand the potential of a metaverse at least. But I wonder, is the metaverse is going to be the normal way, is that going to be the standard way of doing business, of interacting in the future? Or is that something that’s going to be more optional where you can choose to participate or choose not to participate. I mean, how do you view that metaverse opportunity? Is it as big as we’re reading about?
Akash Palkhiwala: I think the example you gave on 3D version of the internet is a great way of thinking about it. I think there’s examples that are more tangible that I think they’re easy to understand. The first one is just looking at any content. You’re watching a basketball game and being able to watch it in the metaverse where you can experience what it would be to be in the stadium when the game is going on. That is a completely transformative experience, that’d be just great to do. The second is gaming. From a gaming perspective, being able to be in the game rather than be viewing the game from the outside. That’s clearly a great way to experience the change in the paradigm as well. The third is in industrial applications.
You could see a scenario where someone is doing some repair work in a large manufacturing environment, say in a car manufacturing plant. Being able to augment the reality that they’re looking at, with say instructions of how to fix something through the glasses. That’d be a great way to use the metaverse technologies as well. Then of course, a lot of the discussion is centered around productivity and the social networks and how metaverse could be a part of those experiences as well. Really it’s discussed as a smaller set of experiences than what I think it’s going to be. There is just a lot of applicability of these technologies in broad areas. That’s what we’re excited about. What we’re doing is working with the top leading companies in the world to bring our technologies to bear.
Jason Moser: Now, we were talking about Microsoft earlier. Microsoft CEO Satya Nadella, recently noted at your Investor Day back in November that there will be 50 billion, with a b, 50 billion connected devices by 2030, more than double today. This plays back on IoT opportunity. I’m wondering if you just tell us a little bit about your relationship with Microsoft today and how you feel Qualcomm will be able to benefit from that over the coming years.
Akash Palkhiwala: Microsoft is obviously an extremely important partner for us. We’re very synergistic in the way we look at our vision of the future aligns. Microsoft’s priority is clearly connecting a lot of devices to the cloud. Then with Azure business they’re the leading cloud provider. The vision that Satya laid out is requiring them to really partner with people like Qualcomm. Because we have all the technologies on the edge that we can use to power those 50 billion devices to connect to the cloud. They’re on one side of the link which is the cloud, we’re on the other side of the link, that’s the device at the edge, and so just really good relationship. If you step back and think about areas that are important to them, PCs, XR, datacenter, these are all areas that we are working with them on. Because the technology portfolio that we have is so relevant to the transformation that is happening in these industries, that it creates this unique opportunity for us and Microsoft to work together.
Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.