Shares of Qualcomm (NASDAQ:QCOM) are up about 34% this year as of Sept. 24, giving the maker of telecommunications chips a slight advantage over the widely observed PHLX Semiconductor Sector Index.
That’s a sharp year-to-date showing considering the company has dealt with some legal wrangling and that the new 5G communications system is expected to be a game changer for companies like Qualcomm. But 5G isn’t rolling out in earnest until 2020. Obviously, 5G is a longer-ranging theme for Qualcomm stock.
Over the near-term, there are some potential headwinds to evaluate, including another flare up in trade tensions between the U.S. and China. As recent history proves, QCOM stock and shares of other chip makers are highly sensitive to trade headlines because China is a marquee export market of domestic semiconductor manufacturers.
During a speech before the United Nations on Tuesday, President Donald Trump blasted China, accusing the country of theft of intellectual property and trade secrets, which as one can easily surmise, are hot button issues in the technology sector.
Trump blasted China on the very day that Qualcomm resumed sales to Huawei Technologies, the controversial Chinese telecommunications gear maker that has been at the epicenter of the trade row between the world’s two largest economies.
“Since Huawei was placed on the backlist in May, U.S. businesses require a government license to sell products or provide services to the Chinese company,” reports Caixin. “The U.S. has argued that Huawei poses a national security threat due to its alleged close relations with the Chinese government.”
China is a crucial market for the company and Qualcomm stock. In addition to selling to Huawei, China-based QCOM buyers include smartphone makers such as Oppo, Xiaomi and Vivo.
China, QCOM Stock, and Other Considerations
The company’s fiscal third-quarter results underscore the importance of China to Qualcomm stock. During that quarter, chip sales fell 13%, with some of that decline attributable to the U.S. ban on sales to Huawei. Fortunately, Qualcomm’s licensing business, a primary revenue and earnings driver for the company, is poised to deliver decent growth.
“We expect Qualcomm’s licensing business, the driver of the firm’s narrow moat rating, to see solid growth, due to our expectation of continued 4G penetration while 5G appears to be another strong opportunity as the technology ramps in 2020 and beyond,” said Morningstar in a recent research piece.
Like other legacy, mature technology companies, Qualcomm also has an embarrassment of riches when it comes to patents that are part of the thesis for the stock.
“Qualcomm is first and foremost the steward of patents associated with wireless communications technologies, originally in third-generation, or 3G, CDMA networks and, later, in 4G LTE networks commonplace today,” according to Morningstar. “Qualcomm’s treasure trove of patents in 3G and 4G allows the firm to charge device-makers a royalty fee as a percentage of the price of each 3G and 4G device sold (as most 4G phones are backward-compatible with 3G).”
Bottom Line on Qualcomm Stock: Catalysts and Valuation
Perhaps the most immediate catalyst for Qualcomm stock will be the debut of the Snapdragon 865 chip, which could be launched any day now. That chip is designed for use in the latest generation of smartphones.
“We’ve heard quite a bit about the Snapdragon 865 from leaks and benchmarks, and if those hold up, there’s no doubt that it will continue Qualcomm’s dominating trend in the hardware space,” according to Talk Android. “Early benchmarks have the chip running a bit faster than even Huawei’s newly minted Kirin 990 5G, and if that holds up, it will give Qualcomm another few months on top of the hill.”
With the headwind of U.S.-China trade back in the picture, it would be helpful to QCOM stock if the Snapdragon 865 meets or beats expectations.
At 18.19x forward earnings, Qualcomm stock trades at barely noticeable premium to the PHLX Semiconductor Index, but its book value and price-to-sales ratios are somewhat rich relative to the benchmark and the shares are in area of being fairly valued at the moment.
Todd Shriber does not any of the aforementioned securities.
