Qualcomm (NASDAQ:QCOM) has become a tech stock that no longer trades like a tech stock. The shares jumped almost 50% in mid-April after the chip maker won a settlement with Apple (NASDAQ:AAPL), then QCOM stock lost half that gain after Judge Lucy Koh ruled it was violating antitrust laws.
Instead, it trades like a defendant.
Since the start of June it has been slowly climbing a wall of worry over the impact of Koh’s decision. Fundamentals — expectations it will earn 62 cents per share on revenue of $5.11 billion when it next reports earnings July 31 — don’t seem to matter anymore.
Do Fundamentals Matter?
Qualcomm opened for trade July 8 at about $76.30 per share. That’s a market cap of $93 billion. It trades at about 4.2 times last year’s $22 billion in revenue and 40.5x last year’s earnings, with a fat 62 cents per share dividend reflecting a 3.2% yield.
That dividend is an investor hedge against legal uncertainties that have plagued the company as CEO Steve Mollenkopf has defended Qualcomm’s business model against challengers from around the world.
He’s had a good track record. Qualcomm has won favorable decisions in Korean, Chinese and U.S. courts. The Apple settlement seemed to settle its right to tie patents to chip purchases. But the decision that it must renegotiate those patent licenses , which the court ruled over the July 4 holiday won’t be delayed, has it claiming it is about to suffer “irreparable harm” after it earlier sided with the Federal Trade Commission’s view that Qualcomm abused its dominant market position to force customers to pay excessive patent licensing fees.
European competition commissioner Margarethe Vestager is also planning on demanding another huge fine against Qualcomm over its policies.
What About 5G?
Meanwhile 5G, the new mobile standard that is in the process of being rolled out to phones, base stations, and machines around the world, opening vast new swaths of frequency spectrum to commercialization, is practically being ignored.
Qualcomm has been quietly going about the business of having its chips certified, and winning the right to charge users for bits used in autonomous cars.
The car decision emphasizes that the growth of 5G won’t just come from people watching cat videos. It will come from machines communicating with “smart city” infrastructure that can prevent traffic jams and schedule maintenance in utility systems and factories.
New markets like augmented reality and virtual reality also depend on having practically unlimited bandwidth. This has led analysts to bring back their hockey stick graphs predicting tremendous growth. Qualcomm’s new legal battlefield involves working with phone companies to make sure people pay for that bandwidth, assuring that the bulk of growth comes from licensed rather than unlicensed frequencies.
In the near term, however, 5G is also subject to tremendous amounts of fear, uncertainty and doubt. Industry hype is pushing users to upgrade even before the necessary infrastructure is in place, with many people thinking they have it even when they don’t.
Bottom Line on Qualcomm Stock
Fortunately for Qualcomm stock owners, the company is better positioned than any of its customers to win the 5G jackpot.
But that jackpot is so large, and Qualcomm has been so aggressive in its licensing policies, that there’s legitimate fear the company may be forced by courts and regulators to back off.
QCOM stock investors may be both overestimating how well the company’s lawyers can do, but underestimating just how much money can be saved, and earned, in a world of wireless sensors and networks that control, and maintain, all the things around us.
The 5G revolution won’t happen all at once. Qualcomm won’t win as much control over it as it’s seeking. But it’s going to be big enough to justify a long-term investor seeking an entry point in Qualcomm stock after any legal setback.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.
