It seems like more of the technology leaders are starting to see analyst downgrades heading into the fourth quarter of 2024. This time around it’s Qualcomm, Inc. (NASDAQ: QCOM) getting its turn in the barrel. KeyBanc analyst downgraded shares of the tech company over concerns that Apple will create its own modem chipsets, while personal computer demand still hasn’t recovered and AI offerings are taking longer for mass adoption.

KeyBanc Capital Markets downgraded Qualcomm to Sector Weight from Overweight on Tuesday, and no price target was assigned. 

Tactical Bulls always reminds investors and its readers that no single analyst report should ever be the sole basis to buy or sell a stock. That decision to buy or sell (or hold or short sell) is up to each investor and the decision should be made with a financial advisor. If this analyst downgrade proves to be right, tactical investors may feel there are other technology stocks where large customer risk poses less of a risk to revenues and earnings.

Rather than this news being about those rumors of a potential offer for Intel Corporation (NASDAQ: INTC), this downgrade is directly tied to Apple Inc. (NASDAQ: AAPL) and tied to a lack of demand recovering in the personal computer market. Another issue is that Qualcomm is supposed to be an edge AI play, but with the end markets for AI being slow to materialize then Qualcomm isn’t as likely to benefit from a replacement cycle as fast as many investors were hoping for.

Qualcomm designs and makes the modem chips used in the iPhone models and it has been in a pact with Apple to supply smartphone chipsets like this for launches in 2024 through 2026. The problem is that rumors are out there that Apple is trying to create its own modem chipsets in-house. If the reports prove to be true and were to scale rapidly, it would create a serious future overhang rather than immediately hurt Qualcomm’s revenue and earnings.

Before a wave of panic sets in, please keep in mind that Apple has already designed processors (at the expense of Intel) and that there have been modem stories for years about Apple. Qualcomm’s stock is also down about 30% from its peak. And we should also keep in mind that taking the in-house side of technology has proven to be far more difficult in action that in theory. Still, the goal is simple enough — imagine if Apple could pocket an extra $25 to $50 (or more) net after development costs on every iPhone sale.

John Vinh, KeyBanc’s analyst behind the downgrade, noted that Qualcomm’s last annual report included the notation that Apple (and Samsung) each accounted for more than 10% of its consolidated revenues. This should not be a surprise considering how few smartphone makers there are to choose from. Samsung makes many of the Android-based smartphones and Apple makes the iPhone (as if you didn’t know). Other smartphone makers generally cater to lower-end phones and phones sold in emerging markets, and those smartphone prices are generally too low to include the premium chipsets sold by Qualcomm.

The problem here is that channel checks indicate that Apple may be closer to actually pulling off the in-housing of these chips. John Vinh said:

Our supply chain work has confirmed that Apple will begin to ramp its internal modem in stages over the next several years.

Vinh sees the headwind to Qualcomm’s earnings at about $1.55 to $1.65 if Apple goes on its own. Outside of this report, the consensus earnings (EPS) estimates are $10.08 EPS in 2024 (16.4 P/E) and $11.13 EPS in 2025 (14.8 P/E).

While this effort would bring significant benefits for Apple’s costs and earnings, it is very possible that Apple would only be able to use its own chipsets on some of its iPhone models rather than using them in all of its iPhone models. Or at least a phasing-in process may take time. Qualcomm can also continue to target PC sales and other markets for its chipsets as well with 4G IoT offerings.

Qualcomm was indicated down over 1% at $165.00 after the KeyBanc downgrade. Its 52-week range is $104.33 to $230.63 and FinViz lists its consensus analyst price target as $218.10. Qualcomm’s stock was last seen up 14% YTD and up 48% from a year ago.