Amid the beginning of the 5G rollout, Qualcomm (NASDAQ:QCOM) remains more controversial than ever. QCOM holds tremendous monopoly power that has brought about both attacks and acquiescence from regulators and peers. Such battles have often driven the direction of Qualcomm stock.
They have also led to misconceptions about the company, specifically surrounding its valuation and competitive status. However, by understanding these assumptions, investors can develop a better understanding of both Qualcomm, and ultimately, QCOM stock itself.
Myth #1 – Qualcomm’s Monopoly Status Is a Negative
In recent years, lawsuits and regulatory rulings revolving around its dominance of smartphone chipsets drove Qualcomm stock. The company fought legal battles with Apple (NASDAQ:AAPL) for years. Moreover, the U.S. Federal Trade Commission (FTC) sued and won a lawsuit against Qualcomm, charging that the company used its dominant position in the wireless chipset market to charge unnecessary licensing fees.
However, that power has worked in QCOM’s favor more recently. The need for 5G has overshadowed any concerns that it has become a monopoly. Apple settled its long-time legal battles within the company. Qualcomm also won a “pause in enforcement” in the FTC ruling.
In truth, Apple has not stopped fighting. It bought the wireless chipset unit from Intel (NASDAQ:INTC), presumably to offer a competing product. Still, should Apple succeed here, QCOM would likely maintain the market lead. Moreover, Qualcomm can then argue that its monopoly power has disappeared. No matter how this plays out, it is a win-win for Qualcomm.
Myth #2 – The U.S. Will Have Full 5G Coverage
Many assume 5G will quickly dominate wireless. Admittedly, this myth works somewhat against Qualcomm stock. Some analysts speculated that chipset revenue would rise from just over $2 billion to almost $23 billion by 2026.
Recent experiences in the rollout could call that growth into question. As Ian Bezek states, some early adopters of 5G experienced issues. In South Korea, one of the first countries to roll out 5G on a large scale, users complain of slow speeds and poor quality. Now these tests indicate that it will take more cells than anticipated to provide adequate 5G coverage.
Nonetheless, we have to remember that about one-fourth of America’s rural population still lacks access to broadband, according to the FCC. Given this disparity, I would expect many will stay with 4G or perhaps even 3G solutions for longer than anticipated. While I do not expect this to stop 5G, investors may want to prepare for a slower-than-expected rollout.
Myth #3 – Qualcomm Stock Is Expensive
One can find stories arguing against buying Qualcomm stock without leaving the InvestorPlace site. From certain points of view, bears appear to have a point. QCOM stock also fell from its 52-week high in early November after Morgan Stanley (NYSE:MS) downgraded the stock from “overweight” to “equal weight.” However, from a price-to-earnings-to-growth (PEG) perspective, valuation metrics appear to indicate otherwise.
For all of the concerns about valuation, QCOM stock trades at a forward price-to-earnings (PE) ratio of about 14.5. Wall Street forecasts earnings increases of 18.4% in the 2020 fiscal year and 45.8% in 2021. Even if issues with 5G rollouts cause those forecasts to come down somewhat, the price-to-earnings-to-growth (PEG) ratio will likely remain below one.
Bears also cite recent stock price activity as an argument for either selling or at least holding off on further buying. Since the beginning of 2019, Qualcomm stock has risen by around 57%. However, most of this came after the Apple settlement. Also, investors should remember that Qualcomm stock saw little growth during its legal battle with Apple.
Only recently did it return to the highs of 2014. Hence, I see it as playing catch-up rather than surging ahead of its valuation. While I can understand not wanting to buy after a large run-up, PE and PEG ratios continue to indicate that QCOM remains a buy.
The Bottom Line
Misconceptions about its competitive status and the pace of 5G rollouts may continue to affect Qualcomm stock. Investors could see some selloffs if consumers and businesses take to 5G slower than anticipated. They may also worry if Apple offers a viable alternative to Qualcomm’s 5G chipsets or if the government begins enforcement on the antitrust ruling.
However, none of these will likely stop the double-digit profit growth to Qualcomm stock. In the end, investors may experience ups and downs, but they should also expect the ups to outweigh the downs.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
