While Qualcomm (NASDAQ:QCOM) stock has gained an impressive 49% in 2019, that does not tell the whole story. Keep in mind that QCOM stock has been quite volatile. And much of that volatility has been due to QCOM’s patent dispute with Apple (NASDAQ:AAPL).
But since the resolution of that dispute, QCOM stock has been off to the races. In fact, its valuation has gotten a bit high, as the price-earnings ratio of QCOM stock is close to 24. What’s more, QCOM stock is only slightly below analysts’ average price target.
And QCOM still faces considerable risks. It remains vulnerable to potential regulatory crackdowns on its licensing model. If it loses in court, its revenue could drop meaningfully.
QCOM also has problems in China. The Trump administration has banned American companies, including Qualcomm, from doing business with Huawei, one of Qualcomm’s largest customers.
But regardless of all that, I still think the outlook of Qualcomm stock remains upbeat, and I believe that it can rise meaningfully next year. Here are three positive catalysts that can push Qualcomm stock higher:
The 5G Revolution
For Qualcomm stock, the mega catalyst is 5G. In the next few years, there will be a massive rollout of this core technology.
Qualcomm has a long history of capitalizing on these types of transitions. More importantly, it has developed state-of-the-art technology that can be used to facilitate the transition to 5G. AAPL was forced to settle its litigation with Qualcomm primarily because the iPhone maker could not build 5G devices without Qualcomm’s products.
One of QCOM’s innovations related to 5G is dynamic sharing, which allows carriers to seamlessly change from 4G to 5G.
5G will also be be used in devices other than smartphones. On QCOM’s latest earnings conference call,CEO Steve Mollenkopf said: “We are actively focused on helping to define and standardize releases 16 and 17 features to support the expansion of 5G into new large adjacent markets such as enterprise, industrial IoT and automotive. The complexity and expansion of cellular technologies beyond the smartphone into nearly every industry play directly to Qualcomm’s strengths and why we believe 5G will represent the single biggest opportunity in Qualcomm’s history.”
Even though 5G will be the primary driver of Qualcomm stock, there are some other important catalysts.
J.P. Morgan analyst Samik Chatterjee wrote: “We believe investors have largely ignored the non-smartphone revenue opportunities that Qualcomm is geared to leverage over the next several years. These opportunities include an already building pipeline in automotive as well as opportunities in IoT devices, beyond the 5G related opportunity in small cells.”
For example, Qualcomm’s telematics and Snapdragon cockpit technologies for automobiles have gained momentum. The pipeline of its auto unit is now a hefty $6.5 billion, compared to $5 billion at the beginning of the company’s fiscal year. Over time, its technology should enable it to penetrate new, lucrative categories like the automotive safety market.
The company’s Compute business has also been showing strength. An example of that is Microsoft’s (NASQAD:MSFT) use of Qualcomm’s Snapdragon 8cx chip for its Surface Pro X device.
Given Qualcomm’s dominance of critical 5G technologies and of other categories like automotive, QCOM stock does deserve to trade at a premium. Its future annual gains will probably not be as large as those of 2019. But they should still be pretty good.
Besides, the company continues to be shareholder-friendly. It plans to spend $7.1 billion on buying back QCOM stock during the rest of FY19. Then there is its dividend yield, which, at nearly 3%, is actually one of the highest in the technology industry.
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.