Qualcomm (NASDAQ:QCOM) stock has entered a new phase amid 5G rollout. For now, it is the only manufacturer of 5G chipsets. This has set Qualcomm stock on a course for considerable gains in future years. Moreover, QCOM has beaten back challenges that would have caused pain for other companies.
Interestingly, the greatest threat to QCOM stock does not come from competitors. Thanks to its dominance in 5G, it has also become vulnerable to international politics.
In the end, this still sets Qualcomm stock up for huge gains, albeit with factors that could cause significant disruptions.
Qualcomm sits in the catbird seat as consumers begin to adopt 5G. Qualcomm holds a de facto monopoly in 5G smartphone chips. Everyone knows this — it even lost a court battle with the Federal Trade Commission as a result.
Bowing to QCOM’s Dominance
But none of that matters.
So powerful is the monopoly that the judge granted a stay in enforcing that judgment. Apple (NASDAQ:AAPL) also ended a long-standing legal battle with the company to gain access to Qualcomm’s Snapdragon 855 5G chips.
Investors should consider this a tactical shift rather than a surrender. After “surrendering,” Apple bought Intel’s (NASDAQ:INTC) smartphone modem business. This could lead to Qualcomm eventually having a viable competitor.
However, that is a worry for another day. For now, Qualcomm stock stands to benefit as consumers begin to adopt 5G en masse. Also, this move has only just begun. As I stated in a recent article, analysts expect the 5G chipset market to grow from $2.1 billion in 2020 to $22.9 billion in 2026. Even if Apple finds a way to compete, one has to assume QCOM will accrue most of this benefit. It goes without saying that at 14.1 times forward earnings, this dominance comes at a huge bargain.
Qualcomm stock will also pay investors well while they await the move to 5G. As InvestorPlace’s Chris Markoch states, QCOM pays a safe, stable dividend. This payout yields just over 2.8%. The dividend has also increased annually for the last eight years. Given the projected growth, investors can probably expect these annual payout hikes to continue for years.
Consider the China Factor
Considering these benefits, Qualcomm stock sounds too good to be true. And it is, almost. However, QCOM faces one critical geopolitical threat — China. I never advocate all-in positions in individual stocks anyway. However, Qualcomm’s deep ties to China make such a strategy even more dangerous for QCOM stock.
For one, China (including Hong Kong) accounted for $11.6 billion of the company’s $24.3 billion in revenue in fiscal 2019. One can forgive investors for feeling nervous about this, given how cutting off U.S.-China trade would devastate Qualcomm stock.
However, like Apple, China needs Qualcomm’s chipsets to implement 5G in its own country. The geopolitical implications of that power probably deserve an article in themselves. Long story short, Qualcomm could conceivably have to choose between continuing its battle with the Hong Kong protesters or falling behind in 5G.
Leaders such as the one that rules China do not always make the most rational decisions. Also, some on our side of the Pacific have called for a total trade embargo with the People’s Republic. I think China will choose trade over politics. If it does not, Qualcomm stock will experience deep pain — and the buying opportunity of a lifetime. Either way, 5G will take QCOM much higher, but China makes that growth path more uncertain.
Concluding Thoughts on Qualcomm Stock
Investors should expect Qualcomm stock to prosper over the next few years, but not without some potential major setbacks. Qualcomm has developed a monopoly in 5G smartphone chipsets. So powerful is this dominance that both companies and, in some cases, the law, have bowed to its power. Moreover, it offers this dominance along with a notable dividend yield for a very low valuation.
However, the U.S.-China trade war holds powerful implications for the company. China has become the company’s largest revenue source by far. Hence, trade talks could profoundly affect both short and medium-term prospects for Qualcomm stock.
Even with a total cutoff in trade, a worst-case scenario, Qualcomm stock would remain a long-term winner. Still, with both trade and 5G in the balance, investors should take a positive but cautious approach with QCOM stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks but has considered a long position in QCOM. You can follow Will on Twitter at @HealyWriting.
