Throughout the past summer, Qualcomm (NASDAQ:QCOM) tried, but failed, to break above the $80 level. Shareholders need not concern themselves too much about the stock’s neutral direction.
The stock pays a dividend that yields 3.3%. Plus, QCOM stock trades at a P/E of 27.55 times which is higher than its historic four-year average.
Still, the wait for the stock to appreciate will pay off over time. As investors accumulate semiconductor stocks, Qualcomm stock may be the first to break out for many reasons.
5G Qualcomm Chips
Qualcomm will bring 5G modems to midrange phones in the next year. This could spur mainstream smartphone users to upgrade to a 5G-enabled device. As telecom giants like AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) upgrade their network to 5G, consumers may glean over high-end devices like the Samsung Galaxy Note 10 or OnePlus 7 Pro.
They may pick an Oppo, HMD Global, or LG phone that uses the new 7-series Qualcomm processor. Expect dozens of OEMs building 5G-enabled smartphones using the new QCOM chip.
QCOM Has Minimal Competition From Huawei
Huawei’s release of a premium flagship smartphone, the Mate 30, introduces the market to its powerful Kirin A1 processor. This chip will have Bluetooth 5.1. It will have Isochronous Dual Channel Bluetooth data transmission technology. The lower latency and lower power consumption will pose a challenge to Qualcomm’s new Bluetooth 5.1 and Wi-Fi 6 networking chip.
Qualcomm promises broadcasts which will allow for streaming audio from a smartphone to multiple devices. But beating Qualcomm stock on technical specifications is not enough.
The U.S. banned many of Huawei’s subsidiaries on the grounds of concerns over potential spying by Huawei. Though it gave a 90-day reprieve on the ban in late summer, phone suppliers may opt to use Qualcomm chips instead of Huawei ones. Huawei may end up dominating the Chinese market but Qualcomm has the rest of the world to conquer.
Qualcomm Stock Risks: Banning Huawei and Shutting Out Chinese Suppliers
Investors cannot ignore the macro risks related to the U.S. escalating its trade war with China and banning Huawei products. It restricts business for U.S. firms. For example, Skyworks (NASDAQ:SWKS) and Broadcom (NASDAQ:AVGO) both dipped in the last week to price in such trade risks.
To adapt to tough U.S. negotiating tactics, China may reroute its orders away from U.S. suppliers, helping Asian firms instead. This would hurt U.S. companies and would eventually damage Qualcomm’s business in China.
QCOM Stock’s Fourth-Quarter Outlook
Investors should not expect Qualcomm to issue a lowered outlook the way Micron Technology (NASDAQ:MU) did recently. Micron is facing DRAM and NAND pricing pressure, while Qualcomm is preparing for the shift from 4G to 5G. In Q3, it reported a doubling of design wins.
This sets Qualcomm’s 5G growth trajectory for early calendar year 2020. For the fourth quarter, it forecast revenue in the range of $4.3 billion – $5.1 billion. Expenses will fall 1-3% and EPS will fall sequentially to 65 cents to 75 cents. Its QTL EBIT margin will fall slightly to the 62%-66% range, due to top-line softness. Still, the company benefited from lower operating expenses in the last quarter. Its reduction in excess litigation expenses lowered the negative pressure on its profitability.
Looking ahead, in the next few quarters the 5G transition growth will be offset by a few events. Weakness in China demand and Huawei gaining share in the region will hurt results. Even though Chinese OEMs are managing their inventory ahead of 5G, Qualcomm stock is lowering its shipment estimates for 3G, 4G, and 5G devices. The estimate will fall by 100 million, to a new range of 1.7 billion – 1.8 billion shipments.
Your Takeaway on QCOM Stock
Markets are not betting on Qualcomm beating earnings guidance. But if the company meets its lowered outlook, buyers may start accumulating shares. Its long-term outlook of $2 in EPS is achievable. QCOM signed a supply deal with Apple (NASDAQ:AAPL) that will get the company there. So, investors may buy and hold the stock, waiting for the 5G upside to play out.
As of this writing, the author did not hold a position in any of the aforementioned securities.
