Qualcomm (NASDAQ:QCOM) stock is going to have a massive increase in revenues starting next year. Numerous smartphones and network systems worldwide will begin using 5G technology that the company licenses.
China will be the first country to take on 5G technology in a massive way, according to Qualcomm. QCOM indicated in its latest earnings report that its 5G design wins had doubled in the last three months. However, because of the U.S. ban on exports to Huawei, Qualcomm may end up not supplying China its technology. This will present “headwinds” according to CEO Steve Mollenkopf.
But the CEO says the the first quarter of 2020 will also be an “inflection point” for Qualcomm. The rollout rate of 5G will be much faster than before. He expects over 20 operators around the world will have 5G service and devices within 12 months.
Benefits of 5G
Mollenkopf said that Verizon (NYSE:VZ) expects that three-quarters of its new devices in 2020 will be 5G. AT&T (NYSE:T) expects that by mid-year 2020 it will have nation-wide 5G coverage. The merger between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) will result in a faster roll out across the United States.
5G technology will speed up virtually everything associated with communication, especially mobile gaming. But the real benefits of 5G will actually occur within the carriers. They will be able to deliver video at a fraction of the current costs. More importantly, carriers will be able to offer high-speed Wi-Fi on radio bands, giving consumers more choices.
The average smartphone user today uses 7.2 gigabytes of data. This is expected to increase seven-fold by 2023. Without the 5G millimeter wave technology and the use of more spectrum bands than available today, data speeds would grind down. QCOM’s sub-6 gigahertz technology unclogs data usage and provides huge speed lifts.
QCOM’s Issues With Carriers
In May 2019 a judge ruled in a lawsuit brought by the U.S. Federal Trade Commission that Qualcomm is a monopoly, had wrongly suppressed competitors in the wireless market and had charged excessive fees. Although QCOM is fighting back, it will be monitored for the next seven years.
Roger L. Martin, director of the Michael Lee-Chin Family Institute for Corporate Citizenship at the University of Toronto’s Rotman School of Management, compared Qualcomm’s actions to other recent companies’ efforts in the “pursuit of efficiency.” In the Harvard Business Review, he compares QCOM to Intel’s (NASDAQ:INTC) attempts to squash Advanced Micro Devices (NASDAQ:AMD) through offering discounts to manufacturers who didn’t use AMD’s products. He also compared QCOM to Facebook’s (NASDAQ:FB) purchase of Instagram — a move to dominate Snap (NYSE:SNAP).
“It wasn’t good to have Intel try to quash AMD decades ago by giving computer manufacturers discounts for not using AMD chips, and it wasn’t good to have Qualcomm engage in similar behavior in recent years,” Martin wrote. “Our antitrust policy needs to be much more rigorous to ensure dynamic competition, even if that means lower net efficiency.”
Qualcomm is going to have to tread carefully now that it has an effective monopoly in the U.S. in 5G technology. The company has won a partial stay on the enforcement provisions of the FTC lawsuit. It has yet to file an appeal, but one will likely take place in January.
Qualcomm Stock’s Outlook
In my last article on Qualcomm stock, I wrote that the company is a free cash flow machine. Qualcomm’s balance sheet is also in great shape. It has over $14.4 billion in cash and securities and only $16.4 billion in long-term debt. This is even after spending over $1 billion in share buybacks as a form of shareholder return on capital in the past nine months.
Qualcomm has returned more than $88 billion to shareholders in its history through both dividends and share buybacks. It has $7.8 billion left in its current share buyback plan.
QCOM’s cash flow will pick up significantly next year based on the 5G rollout and carriers’ adoption of its technology. This is the main reason QCOM stock is up from $57 at the end of 2018 to current levels near $76.
Bottom Line on QCOM Stock
Going forward, expect QCOM to continue to show steady free cash flow. The company has indicated that its first quarter of 2020 will show similar growth in sales and earnings as its Q4 guidance. After that, expect QCOM to begin producing results based on increasing market share in the 5G marketplace.
With its 4.9% total yield, including buyback and dividend yields, Qualcomm stock is quite attractive. However, the issues with its FTC lawsuit could end up hurting it in the future.
The patient investor, who is willing to ride the stock for its potential 5G growth next year, should take advantage of dips in the QCOM stock price. If it loses its appeal case, expect to find another buying opportunity.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks and was launched on August 30. Subscribers during September receive a 20% discount, plus a two-week free trial.
