Qualcomm (NASDAQ:QCOM) has had an up and down 2019. QCOM stock started the year in the doldrums. Then, following a massive patent win, Qualcomm stock absolutely exploded to the upside, rallying 50% in a few weeks. More recently, however, Qualcomm has pulled back, hit by demand issues and an unfavorable court ruling.
Where does that leave things as Qualcomm wraps up 2019? At this point, it’s a glass half full sort of story. The intellectual property win against Apple (NASDAQ:AAPL) reaffirmed the company’s patent licensing model and sets a stage for a great deal of shareholder benefit in the coming years.
On the other hand, subsequent court rulings have been more negative. Additionally, the trade war is causing a noticeable slowdown for the time being. When 2020 rolls around, however, expect QCOM stock to start moving up again. Here’s why.
Don’t Be Fooled by Year-End Weakness
Some investors are nervous about the outlook for Qualcomm stock because the next quarter or two are likely to be underwhelming. That’s a fair thing to pay attention to.
Right now, we’re in a transition point for Qualcomm. They are still generating a ton of revenues off of 4G deployment, and we haven’t quite hit the point where 5G revenues will start booming just yet. With the trade war, some clients are pulling back on spending that they would have made on 4G and are either waiting to spend that cash on 5G or foregoing investment altogether.
This clearly hits Qualcomm’s results in the short-term, as the firm gets a huge piece of the 4G mix. However, the short-term pain will be worth it; the demand for mobile data isn’t going anywhere, and the shortfall in infrastructure spending now will have to be made up later.
Qualcomm’s chip sales are down 13% year-over-year (don’t get fooled by headline revenue numbers as the patent royalties they received are a one-off), but demand for communications equipment isn’t going anywhere.
Qualcomm may lose some revenue permanently due to Huawei shifting purchases to Chinese suppliers as a result of the trade war. But overall, most of this year’s decline in revenues will show up as renewed growth in future years. Qualcomm expects revenues to pick back up around the middle of next year as 5G rollout momentum begins to outweigh declines in the legacy 4G business.
Apple Decision and Qualcomm Stock
It’d be easy to assume that Qualcomm’s enviable cash stream will lose steam at some point. After all, the company had a much bigger chunk of the 3G and 4G royalty business than it will be getting with 5G. With its royalty rates in decline, isn’t Qualcomm going to struggle within its core business? And keep in mind that Qualcomm is already taking less 4G royalty revenues than it earned on 3G.
However, due to backward compatibility, revenue streams go on longer than you might expect. Even Qualcomm’s 3G patents should continue to throw off significant revenues for many years. And with 4G still be widely deployed, there’s plenty of time left to reap cash from the current generation; 5G devices will have to backward-compatible to 4G for many years.
Even if Qualcomm ultimately gets a very small share of the 5G market, it will still generate far more royalties from future smartphone units than you might expect.
Qualcomm’s Attractive Dividend
The dividend gives investors another reason to favor QCOM stock. While tech companies generally are not big dividend plays, it makes sense in Qualcomm’s case.
The company’s core business is in licensing IP and generating steady cash flows from doing so. It’s only natural to share that with its shareholders as the cash comes in.
Even with the big rally in Qualcomm stock this year, shares still offer a nearly 3.3% dividend. That’s nearly twice the yield of the S&P 500, and it is one of the largest dividends you’ll find out of a mega-cap tech company.
There is one note of caution, however. Qualcomm decided to pass up its usual dividend increase this year, showing the strain that 2019’s operating results have placed on the company.
I would expect them to go back to annual dividend hikes again next year, as 5G revenues get going. For the time being, however, the lack of a dividend increase is a mild negative for Qualcomm, though it remains a strong income pick overall.
Qualcomm Stock Verdict
In investing, it often pays to the patient. That will be the case for Qualcomm stock over the next year as well. If you’re just looking at the rest of 2019, there are a lot of reasons for concern around QCOM stock.
Once you look out past the next few quarters, however, there are tons of reasons to own Qualcomm. For one, the outcome of the Apple case showed that Qualcomm’s patent licensing model will continue to pay off for many years to come.
Regardless of how the revenue pie splits for 5G, Qualcomm will still be reaping the rewards of 4G and even 3G for a long time to come. The trade war will end sooner or later, causing a sudden uptick in demand for chips.
And finally, Qualcomm remains one of the tech sector’s top dividend-paying stocks. It’s a fine holding for growth and income investors at this price.
At the time of this writing, Ian Bezek owned QCOM stock. You can reach him on Twitter at @irbezek.