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Despite handily beating 1Q25 EPS and revenue expectations and issuing upside guidance for Q2, Qualcomm (QCOM) is trading sharply lower as concerns surrounding the chip company's licensing business swirl. While the QTL segment only accounts for approximately 15% of QCOM's total revenue, it is highly profitable with EBT margins in the 75% range compared to roughly 32% for the QCT semiconductor business. Due to these strong margins, the QTL segment accounted for 36% of total EBT in Q1.

Therefore, any risk to that business has the potential to hit the stock, which is the case today as QTL revenue of $1.54 bln fell just short of estimates and as QCOM issued disappointing QTL guidance for Q2, forecasting revenue of $1.25-$1.45 bln, implying yr/yr growth of just 2% at the midpoint of the range. In Q1, revenue for QTL grew by 5% to $1.54 bln.

• One issue for QTL is that the company doesn't anticipate generating any revenue from Huawei, the China-based manufacturer of telecommunications equipment and consumer electronics that has been impacted by U.S. restrictions and sanctions. The bigger issue, though, is the possibility that QCOM could lose contracts with more Chinese OEMs as the trade war between the U.S. and China heats up.
• QCOM has been attempting to diversify its revenue streams and end markets over the past several years, but China still accounts for approximately 45% of its total business. Currently, the company's technological competitive advantages are enabling it to fend off competition in China, particularly in the high-end smartphone market which is its bread-and-butter business. For instance, QCOM's premium Snapdragon 8 Elite chipsets, which are embedded into higher-end Android handsets, are generating healthy demand. Over time, however, Chinese competitors may chip away at QCOM's dominance in this market.
• Coming off a solid Q4 that saw Handset revenue grow by 12%, QCOM's largest end market (~65% of total revenue) was strong again in Q1 as Handset revenue jumped by 13% to $7.6 bln. The growth reflects higher volume and content increases in Android premium phones driven by stronger consumer demand for recently launched phones. For Q2, QCOM is expecting a slight slowdown in growth, guiding for QCT handset revenues to grow by approximately 10%.
• Looking a bit further out on the horizon, QCOM is likely to see a sharp drop-off in its sales to Apple (AAPL) -- a 10% customer -- since AAPL is moving towards its own chips. In fact, by the end of 2026, nearly all of QCOM's business with AAPL may be gone. This headwind is well-documented, though, and is likely already priced into the stock. Since mid-June of 2024, shares have fallen by more than 25%.
• On a more positive note, the Internet of Things (IoT) end market is experiencing real momentum with revenue jumping by 36% to $1.5 bln, easily beating expectations. This business turned a corner last quarter as revenue growth swung back into positive territory at 22% after posting yr/yr declines in each of the prior three quarters in FY24. The primary catalyst for the turnaround is QCOM's entrance and expansion into the PC/laptop markets with the recent launch of its Snapdragon X Plus 8-core platform. This new chipset is helping to power new AI tools, including PCs with Copilot+.

The main takeaway is that QCOM's better-than-expected Q1 results and Q2 outlook are taking a beat seat to mounting concerns over its licensing business and its significant exposure to China. Momentum in the PC and automotive end markets (Q1 revenue surged by 61% there) should help ease the China-related headwinds, but a slowdown in China due to tariffs/trade policy still represents a significant risk.