Since early August, Qualcomm (NASDAQ:QCOM) stock has seen a steady rise, going from $68 to $83 — or about 22%. In fact, for the year so far, the return about twice that. Yet there remain some notable headwinds with QCOM stock.
Even though there appears to be a thawing of the U.S.-China trade war, the situation is still unpredictable. Qualcomm still gets a substantial amount of revenues from China and relies heavily on Huawei, which is still under much pressure.
What’s more, there remain the ongoing legal issues. The company faces regulatory actions in the U. S. and Europe that could threaten the core licensing model.
But hey, when it comes to Qualcomm, it has a long history of managing through challenges. I also think the company’s main advantages outweigh the problems.
So let’s take a deeper look at why QCOM still looks like a solid bullish play for investors:
Innovation Powerhouse
Since the 1980s, Qualcomm has been able to create global standards in the mobile phone industry. At the heart of this is the powerful CDMA technology, which has proven quite durable.
A key part of this has been a focus on building a massive intellectual property portfolio. Note that there are over 46,000 patents issued.
To get a sense of the power of Qualcomm’s technology, take a look at the recent favorable legal settlement with Apple (NASDAQ:AAPL). It appears that the company had little choice but to cave in since Qualcomm’s 5G technology was standout. For the most part, rival Intel (NASDAQ:INTC) just did not offer enough to be a viable alternative (the company actually got out of the 5G smartphone business!)
More importantly, APPL will be a lucrative source of royalties.
5G Revolution
In the next few years, 5G will become a force across the world. The technology is likely to spur growth in categories like gaming, AI (artificial intelligence), IoT (Internet-of-Things), augmented reality (AR) and so on. There will also likely be new innovations and killer apps that will create new revenue opportunities.
For QCOM stock, the 5G megatrend is likely to be a major catalyst. First of all, the company has experience on capitalizing on these transitions, such as with 3G and 4G mobile networks.
And again, QCOM has been investing heavily in 5G systems. For example, it has clear leadership in critical areas like cellular baseband modem chips. In fact, QCOM has already announced partnerships with more than 30 OEMs.
Here are some of the other innovations that should help drive growth:
- QCOM has developed dynamic spectrum sharing, which makes it possible for carriers to change from 4G to 5G. This should help speed up adoption.
- The company has created sub-6, gigahertz and millimeter wave bands.
- QCOM’s Snapdragon X55 5G Modem-RF System will help with providing 5G Internet services for the home and enterprise.
QCOM Valuation And Financials
Qualcomm remains focused on shareholder value. In the fourth quarter of fiscal 2018, the company authorized repurchase of up to up to $30 billion of QCOM stock. Currently, there is $7.8 billion remaining in the program.
QCOM stock also has an attractive dividend, with the yield at 3%. This is actually one of the highest among large tech companies.
Now it is true that the valuation of QCOM stock is on the high side. Note that the forward price-to-earnings multiple is close to 20x. But then again, a premium is well deserved, especially in light of the secular growth trend of 5G.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
