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Qualcomm third quarter results topping Wall Street expectations as the company reports a beat on the top and bottom line and also delivered an upbeat forecast for the fourth quarter. Shares are rising after those results and Morningstar equity strategist Brian Colello is joining us now to discuss. Brian, so, as you look at these numbers, does it signal to you that the company's smartphone business is really, um, showing a good recovery here?

It it does. And we've been looking for this for some time. I mean, it really couldn't get much worse than what we saw at the end of 2022, start of 2023. So this is a natural, uh, recovery for Qualcomm to be bouncing back. Uh, we see good things across the board, revenue and EPS. The guidance was good and even, uh, the auto side, which is a smaller piece of the business, uh, that was a bit higher than what we were expecting as well. So, uh, some really good things out of this print for Qualcomm.

And what about the forecast? Looking for, uh, adjusted EPS of $1.45 to $1.65. Uh, the estimate was kind of the midpoint between that. What do you see there?

Yeah, I think the the EPS was good. And I'm looking at, um, sort of on the non-GAAP basis, I guess 255 for, um, for the September quarter. So, um, overall I think, um, you know, I I think the company's bouncing back nicely. You know, this is still, you know, the PC story is is very much a multi-year story. So I don't think we're going to see too much, uh, upside from it in, um, in the September quarter. So that's not too much of a surprise. Uh, but the smartphone is steadily recovering. So I think we're in good shape there.

Um, talk to us about the concept of edge AI, right? These AI chips on the devices themselves, not just PCs, but also the phones and kind of where Qualcomm plays in that and and do we learn anything new, uh, this quarter as a result of that business?

Yeah, we'll be listening for for more of that on the call. Certainly the chip makers have to be ready, uh, for when these new technologies emerge and Qualcomm is adding the capabilities to do that. So we still see the AI development being focused, um, in the cloud, um, you know, for for larger workloads, but we're going to see smaller models over time and Apple is a great example of this, um, bringing a smaller model to its device to run locally. Qualcomm's going to have the same thing. There's going to be a lot of smaller models being run on devices, PCs and smartphones and Qualcomm is rightly getting ready for it.

And how does that fit in with their partnership and licensing deals?

Well, the licensing is a bit different in our view. So that's just, you know, collecting a royalty on every 4G and 5G phone out there and that business is as steady as she goes. Um, so, you know, they certainly have the technology to expand in in 4G, 5G, probably 6G as well. Um, but, you know, that's a royalty stream that they can use to put in R&D to really push the needle on the chip business. And that's what they've been doing for, you know, the past few years and they'll be doing it for several more on the AI side.

Um, Brian, um, the automotive business still pretty small as a percentage of the whole, but growing quite quickly, more more rapidly than any other part. What do you think is the potential of that business?

Well, I think there's good potential there and I think it makes sense for Qualcomm to be taking its smartphone processor expertise and moving it to new markets. So PC is one, automotive is another. We're seeing electrification of the car, more and more processing power in the car and that is going to be a multi-year, multi-decade trend. So Qualcomm's going to be in that mix, Nvidia as well, um, NXP, Texas Instruments and some others. So Qualcomm won't be alone, but, uh, they're certainly going to have some great opportunities to have more processors and more connectivity in the cars. So that's something, uh, we're optimistic about about long-term.

So, forget the base case for a second. What's your most optimistic case on auto adoption and these technologies as they are dispersed and enter the auto industry here? How how bullish could you get?

Oh, that's a good question. I mean, they talk about a $4 billion, um, sort of revenue business a couple years ago. And I think last we heard was a $45 billion pipeline. Um, so that pipeline can just keep growing and growing and growing. I mean, there's so many places in the car where processors could be needed from the infotainment system to all of the safety systems, um, and that doesn't even sort of count like, uh, when you get into an autonomous driving world and you need much more processing power there. So there's really a lot of places for for digital processors. So, um, I think I think Qualcomm can do quite well in this business and I mean, if they were to have some sort of clean sweep, I mean, we doubt it, but, um, if they were able to take like the vast majority of this market, I mean, it'd be tremendous upside for the next couple decades.