Over the past year, shares of Qualcomm (NASDAQ:QCOM), the leading chipmaker, are up about 26%. Thanks to its diversified revenue stream and the strength of its technological offering, I believe that QCOM stock belongs in a long-term growth portfolio.
However, there might be some short-term volatility as well as profit-taking, especially ahead of the group’s upcoming quarterly earnings announcement, expected on Nov. 6. Investors could regard any drop of Qualcomm stock as an opportunity to go long the shares.
San Diego, California-based Qualcomm is the largest maker of mobile chips for smartphones and wireless modems. Its chipsets account for about three-quarters of its total revenue.
The group’s other main source of revenue is mobile-phone royalties and licensing. Qualcomm’s patent-licensing division collects royalties from 3G and 4G technologies that the chip giant helped invent. These royalties have been its competitive advantage over the years.
Qualcomm and the Competition
Other companies, including many tech giants such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Samsung (OTCMKTS:SSNLF), that manufacture or use chips, need to obtain a license from QCOM.
Although Qualcomm gets most of its revenue by selling mobile chipsets, most of its profits come from these wireless patents. In other words, Qualcomm’s higher-margin licensing unit has traditionally supported the growth of its lower-margin chipmaking business. And the owners of QCOM stock benefit from the continued reliance of these companies on Qualcomm’s intellectual property.
Yet until Qualcomm’s settlement with Apple, QCOM could not benefit from these royalties fully. So the tide has finally changed in favor of QCOM stock. Shareholders may now look forward to the company concentrating on its business activities, rather than get dragged by legal disputes.
The recent agreement between QCOM and AAPL will enable the two giants to work together. Prior to the agreement, Wall Street was expecting Apple to collaborate more closely with Intel (NASDAQ:INTC), QCOM’s main rival in the chip space. Intel might indeed have lost the most from the QCOM-APPL settlement.
QCOM Stock and 5G Technology
United States is getting ready for the 5G revolution, which will likely boost productivity and growth. This new technology will be at the center of the infrastructure and data economy that will be used to develop smart cities. It will also lower the lag or latency of mobile applications, which should have a positive impact on the development of online gaming as well as self-driving cars.
And Wall Street believes that Qualcomm will play a dominant and early role in 5G, replicating its success with 3G and 4G mobile networks. The company leads the market in cellular “baseband” modem chips for wireless devices.
Many manufacturers have announced that they will be releasing 5G smartphones soon. In the past few months, Qualcomm has demonstrated how its mobile chips will interface with these phones.
It has already entered the 5G smartphone market with its 8-series Snapdragon chip which will be used by Samsung. In 2020, Qualcomm is expected to launch 5G-enabled 6-series and 7-series Snapdragon processors, a move that will increase its reach into mid-range and budget devices, too.
If analysts are correct, QCOM stock is a good pick for long-term investors. The company is likely to provide a significant part of the intellectual property that will be used to develop 5G communications standards.
It is also important to note that 5G has been an important aspect of U.S.-China trade wars. Indeed earlier in 2018, President Trump has blocked Broadcom (NASDAQ:AVGO) from acquiring Qualcomm, as the former was based in Singapore. Qualcomm investors may want to pay attention to trade developments regarding China.
Qualcomm Stock’s Q3 Results Were Mixed
On July 31, the company reported its fiscal third-quarter fiscal 2019 results. Its earnings came in at 80 cents per share.
However, QCOM stock’s revenue was $4.89 billion vs $5.08 billion expected. As global smartphone sales have declined, revenue growth has dried up.
Despite the revenue miss, Qualcomm stock has a strong balance sheet. At the end of the Q3 of fiscal 2019, Qualcomm’s cash and cash equivalents and marketable securities totaled $14.4 billion.
CEO Steve Mollenkopf highlighted that the adverse industry conditions, particularly in China, would likely affect business conditions for the next two fiscal quarters.
The company issued a soft sales guidance, with Q3 adjusted EPS expected between $0.65 and $0.75, rather than the $1.08 that analysts were forecasting. Qualcomm stock’s revenue estimates also came at $4.3 billion, as opposed to the expectations of $5.63 billion.
In its Q4 earnings release, Wall Street is likely to pay attention to QCOM stock’s gross margin, to see if there is any sizable contraction as revenue declines.
Where QCOM Stock Price Is Now
Qualcomm stock had a rough 2018 when the stock price declined by about 13%. However, 2019 has been much better for QCOM investors as the shares are up about 38%.
Its 52-week range has been $90.34 (May 2, 2019) and $49.10 (Jan. 31, 2019). Now QCOM shares are hovering around $79. Can QCOM stock soon be able to reach its recent highs around $90?
As a result of the recent impressive run-up of Qualcomm in the past several weeks, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that QCOM stock has become “overbought.”
Therefore, prior to the release of earnings, Qualcomm might exhibit some volatility and weakness. Furthermore, if the industry weakens or the stock market becomes wobbly due to political or trade developments, then Qualcomm stock may also be adversely affected.
The 3.2% dividend yield of Qualcomm stock is likely to act as support in case QCOM declines in the coming weeks. It would be important to remember that Qualcomm has regularly increased its dividend in the past. Therefore, investors who also pay attention to creating a passive income stream could regard any potential drop in the share price as an opportunity to buy into QCOM stock.
The Bottom Line on Qualcomm Stock
For many years, Qualcomm’s chip production has generated most of its revenue. Meanwhile, QCOM’s licensing business has generated most of its profits, due to a steady stream of royalties from every smartphone maker globally.
Although this model has served the company well, it has come with challenges in recent years, in part due to regulatory and legal issues as well as declining mobile handset sales. As a result, QCOM has been a volatile long-term investment over the past few years.
Going forward, on the 5G front, Qualcomm is likely to be a leader, propelling its earnings growth. With a market cap of $96 billion, QCOM stock currently trades at a forward P/E of 18.1.
And many investors may regard as an acceptable ratio for a tech giant. In comparison, forward P/E ratios of Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA), and Texas Instruments (NASDAQ:TXN) are 30.9, 27.3, and 20.1 respectively.
However, I would not advocate bottom picking if QCOM weakens in the near-term case. On the other hand, I find QCOM stock to be a compelling buy candidate, especially between $70 and $75. And in two to three years, I’d expect QCOM to surge to $95-$100.
As of this writing, Tezcan Gecgil holds covered calls in QCOM (Nov. 1 expiry) and INTC (Nov. 1 expiry) stocks.