From early May, Qualcomm (NASDAQ:QCOM) stock has been on a gradual slide, going from $90 to $76. Yet it’s important to keep in mind that — for the year so far — the performance has still been pretty good. The 2019 return: a hefty 38%.
This is in stark contrast to the fast five years when Qualcomm stock was essentially dead money (the average return was a mere 3%) as many other old-line tech companies did much better, such as Microsoft (NASDAQ:MSFT) and Adobe (NASDAQ:ADBE).
Now the company certainly faces some notable headwinds. Of course, there is the wildcard of litigation. While the company got the benefit of a stay from an adverse opinion regarding a Federal Trade Commission ruling from the U.S. District court, there’s no guarantee that Qualcomm will ultimately prevail. There are also various legal actions and claims in other jurisdictions.
Yet perhaps the biggest problem for QCOM stock is the U.S.-China trade war. Consider that about two-thirds of revenues for the company come from China.
Oh, and then there is the nagging issue with Huawei, which the U.S. has imposed severe restrictions on. Even though QCOM has found some workarounds, there has definitely been an adverse impact on sales. For example, during the latest quarter, the company reduced its full-year unit shipments of smartphones by 100 million to 1.7 billion to 1.8 billion. Much of this was due to the situation in China.
The Positives for QCOM Stock
Despite what’s happening in China, I still think there are some potential catalysts that should help drive QCOM stock. One is the settlement of the patent dispute with Apple (NASDAQ:AAPL). This not only has cleared up a major legal cloud — which could have been particularly damaging — but also will result in a substantial revenue stream from royalties.
Then there is 5G. In fact, this is likely to be game changer for QCOM stock. On the latest earnings call, CEO Steven Mollenkopf said: “For the first calendar quarter of 2020, we anticipate reaching the inflection point as our financial results begin to reflect the benefits of our substantial efforts over the years to bring 5G to the market worldwide.”
No doubt, the company has been pushing the boundaries of innovation. This actually helps explain why AAPL settled its legal dispute. The company realized that it really needs QCOM technology.
For example, one of the differentiators for the company is dynamic spectrum sharing, which allows carriers to seamlessly change 4G spectrum to 5G. This capability is likely to lead to more adoption.
Next, there have been breakthroughs with security, millimeter wave and massive MIMO. What’s more, QCOM is the only chipmaker that has 5G solutions for sub-6, gigahertz and millimeter wave bands.
As a result, the company has been getting lots of traction. According to Mollenkopf on the earnings call: “5G network rollouts are progressing at a much faster rate when compared to 4G. We expect over 20 operators to launch 5G service and over 20 OEMs to have 5G devices in the first 12 months after the first commercial launch. This compares to four operators and three OEMs with the launch of 4G with the major difference being that China is launching 5G in the first year.”
Bottom Line on QCOM Stock
With 5G, there are no guarantees. Let’s face it, there will need to be some killer apps to help with the growth. But given the significant increases in speed, it seems like a good bet that there will be interesting innovations that will emerge.
In the meantime, QCOM stock is trading at reasonable levels, with the forward price-to-earnings multiple at 18x. There is also an attractive dividend of 3.1%. So all in all, QCOM stock does look like a good way to play the lucrative 5G megatrend.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.