Since settling with Apple (NASDAQ:AAPL) over its intellectual property demands, Qualcomm (NASDAQ:QCOM) has slowly begun selling like a growth stock again.
The April announcement sent shares from the mid-$50 range to the mid-$80 range. While it lost some of the boost as the one-time impact was absorbed, the stock opened Nov. 13 at $90.70.
The latest catalyst was its earnings release. For the fiscal year ending Sept. 30, net income came in at $4.4 billion, or $3.59 per share, on revenues of $24.3 billion. The dividend still yields 2.7%.
For the quarter, adjusted earnings per share of 78 cents on revenue of $4.8 billion, also beat analyst estimates, sending the stock up 6% in one day.
Bulls are hoping that this represents a “new normal.” Revenue is no longer being withheld by Apple, and 5G is finally coming.
Can I Have 5G?
The 5G standard, which offers mobile devices performance like today’s WiFi, will spur a replacement of phones around the world. It has already begun an update cycle by the world’s mobile networks.
Qualcomm estimates it will get $1.3 billion to 1.5 billion in patent licensing fees for the current quarter, and make 50% more profit on each 5G modem chip set, by boosting prices. It forecasts 200 million smartphones will be sold in the coming year.
It sounds great, but analysts at Morgan Stanley don’t believe it justifies Qualcomm’s $104 billion market capitalization. They downgraded the stock to “equal weight,” causing a one-day plunge.
The New Normal Isn’t Normal
While the Qualcomm business runs like clockwork, its revenue and profit figures are choppy. That’s because big customers hate Qualcomm like you hate your cable company.
The company’s policy of requiring license fees on modems, whether or not Qualcomm makes them, was behind the Apple suit. The issues are now being renewed by Huawei, the Chinese phone and equipment giant that is at the center of the U.S.-China trade war.
Huawei has sought to run the Qualcomm playbook, filing for patents on every innovation it can. But analyst Jeff Kagan says the Huawei patents are of lower quality, and less essential, than those of Qualcomm. Put the struggle into a neutral court and the outcome should be the same as what happened with Apple.
The question is whether there will be a neutral court. The Huawei-Qualcomm battle is not strictly a legal battle. It’s also a geopolitical one. President Donald Trump’s administration has put Huawei gear on a blacklist, but Huawei is successfully defying it. It has a global market share of 29% in telecom equipment. In Europe its market share is closer to 50%, due to lower prices. Now, China is now the world’s largest mobile market. America has become Comcast (NASDAQ:CMCSA).
On the phone side, Korea’s Samsung (OTCMKTS:SSNLF) and Taiwan’s MediaTek (OTCMKTS:MDTKF) are both rolling out modem chipsets, challenging Qualcomm’s hegemony. Despite losing in court, Apple is still making its own chips, crimping Qualcomm’s revenue projections.
The Bottom Line on QCOM Stock
The real pull of 5G won’t come from phones. It will come later as factories, governments and personal appliances adapt to the idea of network ubiquity.
Traffic lights adapting to cars, cars driving themselves, sewers scheduling their maintenance, lawns turning on sprinklers and medical devices preventing heart attacks are all coming.
No one knows how fast that can happen. No one knows how the battle with Huawei will end. These uncertainties will plague Qualcomm stock, providing trading opportunities and keeping the shares from performing in line with bulls’ expectations.
Qualcomm deserves a place in a long-term growth portfolio. But investors should expect a wild ride, not a smooth one.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.
