The trade war between the United States and China shows no signs of abating. This is reason enough to be fearful while considering exposure to a stock that derived 66.6% of 2018 revenue from China. Qualcomm (NASDAQ:QCOM) stock has been hit by the trade war and the impact on its growth in likely to persist in the coming quarters.
However, I believe that it’s time to be greedy when the fear factor dominates. I would advise fresh exposure to QCOM stock at its current levels. This article will discuss the near-term concerns and the catalyst for Qualcomm’s revenue growth in 2020 and beyond.
Concerns for Qualcomm Stock
A potential medium-term headwind for QCOM is the global economic slowdown. The trade war has possibly accelerated the slowdown and this will impact the company’s revenue. To put things into perspective, smartphone shipments declined by 2.3% in the second quarter of 2019. This directly impacts the company’s Qualcomm CDMA Technologies segment, which contributed to 76% of its revenue in 2018.
Specific to the trade war, Huawei has gone aggressive in terms of grabbing market share from rivals in China. The trade war restriction is a key reason behind Huawei ramping up its efforts to gain market share.
This indirectly impacts Qualcomm since the company is a supplier to Xiaomi, Oppo and Vivo. As these companies lose market share, the sale of QCOM chips is likely to continue declining.
However, I believe that the trade war will de-escalate in the next few quarters. When global economic growth weakens further, there will be pressure on governments to cooperate and boost growth.
In a globally synchronized economy, it’s unlikely that the current tariff war is sustainable. Consumers — not just businesses — will feel the impact of potentially high prices.
5G Presents a Big Opportunity for QCOM
The launch of 5G in 2020 and beyond is a potential stock upside catalyst amidst economic concerns and slowdown in sales related to trade war.
The global 5G chipset market is expected to be $2.1 billion in 2020. Further, the market is expected to reach $23 billion by 2026.
According to Qualcomm’s March 2019 presentation, the total market for goods and services enabled by 5G is likely to reach $12 trillion by 2035. Therefore, 5G can trigger sustained revenue growth during this period.
It is important to mention that the 5G rollout can be swift with more than 20 operators. In addition, more than 20 original equipment manufacturers are gearing up for 5G. The company’s Snapdragon X55 modem is already being used by Samsung, Xaomi, ZTE (OTCMKTS:ZTCOY), LG and HTC among others.
As operators roll out 5G globally in 2020 and beyond, the demand for the company’s modem will accelerate and drive revenue growth.
Another interesting point is that 5G is likely to have a widespread impact and open multiple doors of revenue for Qualcomm. Just as an example, it is estimated that 5G will have a sales enabling effect of over $1.1 trillion in the healthcare sector. Remote diagnosis and imaging, predictive analysis and continuous monitoring are some of the areas of application.
Similarly, the number of embedded internet connections in automobiles will increase from 96 million in 2018 to 690 million in 2027. It is expected that 5G automotive connections will reach 96 million by 2027. This presents yet another growth opportunity.
Therefore, 5G provides hopes to boost sagging sales and I believe that Qualcomm can witness a turnaround in terms of revenue and earnings per share growth momentum in the next one or two years. This should keep the markets interested in the stock in 2020.
The Bottom Line on QCOM Stock
Qualcomm stock is facing macroeconomic and trade war headwinds for the foreseeable future. However, I believe that any weakness in the stock is an opportunity to accumulate.
Besides the 5G launch trigger, Qualcomm will create sustained shareholder value through share repurchase and healthy dividends. As an innovator, QCOM has healthy growth visibility in the domain of 5G and artificial intelligence. Moreover, the company has robust liquidity and financial muscles to support investment in research and development.
I would therefore advise fresh exposure to Qualcomm stock even as markets worry about the impact of the trade war. Once there is potential resolution on that front, QCOM stock can surge ahead.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.