Much of the discussion about Qualcomm’s (NASDAQ:QCOM) 2020 prospects has revolved around the trade war. And with good reason. The company is heavily reliant on international revenues. Not only has the trade war held up sales out of China, it has also caused carriers to delay their 5G rollouts.
Lacking clarity on the 5G landscape, and what role Huawei has to play, investment timelines have slowed down. That’s a big headwind for Qualcomm. With a seeming trade deal now almost here, Qualcomm is set for a big rally, right?
Another issue, however, is whether or not 5G technology is truly ready for the prime time. Some folks are suggesting that, at first, 5G-enabled handsets are as much marketing hype as they are truly improved user experience.
Verizon Launch Hasn’t Delighted Users
Verizon (NYSE:VZ) has made a huge deal about leading the rollout of 5G in the United States. In particular, Verizon has spent a ton of money deploying 5G at a bunch of huge venues, such as Madison Square Garden, and then advertising this fact like crazy. In theory, this was supposed to lead to a lightning-fast user experience for fans, even when tens of thousands of attendees wanting to upload photos and other such data-heavy applications simultaneously.
But things haven’t worked nearly as impressively as users may have expected. That’s because 5G relies on millimeter-wave signals which don’t travel that far, and are easily blocked by obstacles. As a result, 5G doesn’t go far, and — for the time being — can’t even cover the whole seating area of a stadium, let alone travel beyond it.
An ArsTecnica article covering the Verizon 5G stadium rollout ended as such:
The reality of 5G has so far fallen short of the hype stoked by carriers and Federal Communications Commission officials, who have claimed 5G is so revolutionary that the usual rules and regulations shouldn’t apply to its rollout.
Early 5G Adopter South Korea Faces Issues
South Korea has been one of the world’s first major countries to roll out 5G on a large scale. While the user experience hasn’t been terrible, it’s left a lot to be desired as well. As an article from the Financial Times noted in July:
The world’s first and largest 5G mobile network has come under fire from customers for poor quality, slow connections and lack of applications that use the new standard.
South Korea went live with 5G in April, so this wasn’t just an opening week of use bugs either. One user complained that while 5G was supposed to be up to 100 times faster than 4G, in actual practice, streaming video was only modestly quicker than before.
It’s easy to blame a lack of sufficient 5G base stations. But they don’t come cheaply. South Korea’s mobile carriers have already spent billions on 5G to deploy coverage across a small, densely populated country, and yet it hasn’t been nearly enough to create a reliable network. If 5G isn’t up to standards yet in highly urban South Korea, more spread-out countries like the U.S. and Canada could pose real challenges to the mobile carriers.
Nationwide 5G Rollout Won’t Be Quick
It’s one thing to cover a stadium with 5G. It’s worth the heavy investment because tens of thousands of people are there to benefit from it. Look at 5G maps for even dense urban areas like Chicago, however, and you see that Verizon is struggling to get any sort of broad coverage network yet. In many areas, 5G doesn’t even travel for a full block. Just walking 100 feet in one direction can easily take a user out of range.
Now think about deploying 5G networks across suburban and rural areas. It simply isn’t going to be practical or affordable yet in many cases, or at least not until the technology improves and becomes standardized. Eventually 5G will make it everywhere. But you probably shouldn’t be banking on consumers rushing to buy 5G-equipped handsets in 2020.
Qualcomm’s Bottom Line
I have a position in Qualcomm. I have been long for years, and have confidence in management’s ability to navigate the various roadblocks in front of the company. Its big win in the patent lawsuits with Apple (NASDAQ:AAPL) earlier this year helped drive that point home. Qualcomm knows how to adapt to changing conditions in the industry and make sure it earns its due reward from its intellectual property along the way.
In such a cutthroat industry, however, nothing comes easily. There are new challenges almost every quarter. In this case, the technology itself could hold back 5G ambitions for quite awhile. Consumers think that each new wireless cycle results in seamlessly improved experience. Unlike 3G and 4G, however, 5G could take some time to get right due to limitations with the spectrum.
It’s been easy to assume that once the trade war clears up, Qualcomm will roll in profits as 5G-enabled handsets boom. At least for 2020, however, 5G may disappoint consumers, and not gain nearly as much market traction as expected. Over the long haul, Qualcomm should make plenty of money off of next-generation wireless technology. But it might be time to rein in your expectations for at least the next few quarters.
At the time of this writing, Ian Bezek owned Qualcomm stock. You can reach him on Twitter at @irbezek.