Shares of Qualcomm (NASDAQ:QCOM), the leading supplier of modem technology for smartphones, have gained 45% so far in 2019. Most of the rally of QCOM stock came in the second half of April, when the chipmaker finalized a favorable agreement with Apple (NASDAQ:AAPL) regarding intellectual property (IP) licensing fees for chips used in Apple’s mobile devices. The settlement dismissed all outstanding litigation between the two parties.
I believe that Qualcomm’s deal with Apple positively impacts the outlook of QCOM’s 5G chip business and the company’s growth prospects. Therefore, long-term investors should consider buying QCOM stock
However, currently the markets are jittery as investors wonder how the U.S.-China trade war may progress. And QCOM stock, like many other momentum stocks, is likely to be adversely affected in the coming weeks. Investors should regard any drop of QCOM stock as an opportunity to go long the shares.
Qualcomm Stock and the 5G Revolution
Analysts believe QCOM will play a dominant and early role in 5G, replicating its success with 3G and 4G mobile networks. If the 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.
Meanwhile, 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 that may have lost the most from the QCOM-APPL settlement.
5G, which will boost productivity and growth, is currently being rolled out commercially in the U.S. The benefits of 5G will include much faster download speeds and more data capacity, which is a must for Internet of Things (IoT) devices.
5G 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. 5G will also be at the center of the infrastructure that will be used to develop smart cities.
Manufacturers have announced that they will be releasing 5G smartphones soon, and during its December 2018 Snapdragon Tech Summit, Qualcomm demonstrated how its mobile chips will interface with these phones.
Analysts are optimistic that the launch of 5G will enable Qualcomm to collect more royalties and increase its bottom line, lifting QCOM stock. Analysts on average expect QCOM’s profit to jump by double-digit-percentage levels in future quarters.
QCOM Stock Will Be Boosted by QCOM’s Strong Fundamentals
QCOM is the largest maker of chips for smartphones, and its chipsets account for about two-thirds of its total revenue. Its second-highest source of revenue is mobile-phone royalties and licensing. About 60% of its pre-tax profits are from its patent-licensing division, thanks to royalties from 3G and 4G technologies the chip giant helped invent.
Other companies, including many tech giants such as Apple, Microsoft (NASDAQ:MSFT), and Samsung Electronics (OTCMKTS:SSNLF), that manufacture or use chips need to obtain a license from QCOM. And the owners of QCOM stock benefit from the continued reliance of these companies on QCOM’s intellectual property. However, until QCOM’s recent settlement with Apple, QCOM could not benefit from these royalties fully, So the tide has finally changed in favor of QCOM stock.
On May 1, the company reported its fiscal second-quarter earnings, which topped analysts’ expectations. Its earnings came in at 55 cents per share of QCOM stock on net income of $663 million. Qualcomm gave strong Q3 guidance, mostly thanks to the settlement with Apple. QCOM also has a strong balance sheet. As of March 2019, it had $10.4 billion of cash.
The Bottom Line on Qualcomm Stock
On the 5G front, Qualcomm is likely to be a leader, propelling its earnings growth. Within two to three years, investors who buy QCOM stock are likely to be rewarded handsomely.
However, QCOM stock might be weak in the short-term. As a result of the recent impressive run-up of QCOM stock, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that QCOM stock has become “overbought.”
The 2.98% dividend yield of QCOM stock and QCOM’s generous stock repurchase program are likely to act as support in case QCOM stock declines further in the coming weeks.
Furthermore, if the industry or the stock market weakens as the U.S.-China trade conflict intensifies, then Qualcomm stock may also be adversely affected.
In other words, I would not advocate bottom picking if QCOM weakens in the near-term case. Yet, I find QCOM stock to be a compelling buy candidate and by the end of 2020, I’d expect QCOM stock to surge to $95-$100.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.