What a good year it has been for shareholders in Qualcomm (NASDAQ:QCOM). Year-to-date, QCOM stock is up over 55%. In comparison, the S&P 500 is up 27%.
Now, many investors are wondering if the chip maker can show a similar performance next year. Although it is impossible to predict the future, I expect Qualcomm stock to have another good year in 2020.
However, in the next few weeks, there might be some short-term volatility as well as profit-taking in QCOM shares. Investors could regard any drop of Qualcomm as an opportunity to go long the stock.
Qualcomm Reported Robust Q4 Earnings
San Diego, California-based Qualcomm is the world’s largest supplier of mobile processors and baseband modems.
When it released fiscal fourth-quarter results on Nov. 6, it beat revenue and earnings estimates. The company reported revenue of $4.8 billion and adjusted earnings per share of 78 cents.
Revenue comes from three segments:
- QCT (Qualcomm CDMA Technologies): semiconductor business, accounts for 60% of revenue;
- QTL (Qualcomm Technology Licensing): licensing business, accounts for 19% of revenue; and
- QSI (Qualcomm Strategic Initiatives): makes strategic investments, accounts for 1% of revenue.
Chances are good that you may be reading InvestorPlace.com on a device using a Qualcomm processor.
Yet, the chipmaker said the strong Q4 profit was primarily due to its technology licensing segment. Qualcomm’s patent-licensing division collects royalties from 3G and 4G technologies that the chip giant helped invent. These royalties have been its competitive advantage over the years.
Many companies such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Samsung (OTCMKTS:SSNLF), that manufacture or use chips, need to obtain a license from QCOM. And the owners of QCOM stock profit from the continued reliance of these companies on Qualcomm’s intellectual property.
For Q1, management’s revenue forecast of $4.4 billion to $5.2 billion was in line with estimates.
Investors cheered that Qualcomm stock is moving in the right direction in terms of market leadership, revenue and profitability. Following the quarterly results, shares went up about 10% in one day.
QCOM Is Expected to Benefit From 5G
William Lehr of the Massachusetts Institute of Technology states that “The future of the global economy is digital.” He also writes that “… the success of robust competition and demand for 5G holds the promise of significant economic growth.”
In early December, Bank of America analyst Tal Liani reiterated his “buy” rating on QCOM stock with a target of $100 per share, as he believes that Apple’s 5G iPhones could contribute up to $4 billion in revenue to Qualcomm by fiscal 2022.
InvestorPlace readers may well remember that in 2019 Apple and Qualcomm ended their court battles as AAPL management agreed to pay royalties of $8-$9 per iPhone to QCOM for patent infringement. In other words, Apple admitted that there is no alternative to Qualcomm for its iPhones.
According to QCOM stock’s Q4 quarterly results, the company expects to ship between 175 million and 225 million 5G handsets next year. These handsets have 5G modems as well as several patents that smartphone manufacturers need to license for the devices.
Similar royalties have been Qualcomm’s competitive advantage over the years. In fact, while QCOM stock gets most of its revenue by selling mobile chipsets, most of its profits come from its current wireless patents. In other words, Qualcomm’s higher-margin licensing unit has traditionally supported the growth of its lower-margin chipmaking business.
Recent research led by Farshad Madani of Portland State University highlights that “Patents can play a main role for emerging technologies like 5G.” If analysts are correct, QCOM stock is indeed a good pick for long-term investors.
What Could Derail QCOM Stock?
In 2019, Qualcomm shares have bounced back from the big selloff at the end of 2018. And over the past year, QCOM shares are up about 55%.
Since late May, QCOM shares have gained about 35%. On May 29, Qualcomm stock saw a low of $64.76. But on Nov. 8, QCOM shares hit a 52-week high of $94.11.
Now they are hovering around $88.
Investors are wondering if QCOM stock may be able to make a new high any time soon. However, as a result of the impressive run-up in QCOM stock, several technical indicators have become somewhat overextended.
Therefore, as we approach another important earnings season in many tech stocks, QCOM stock might be weak in the short term. In case the industry softens or the stock market becomes wobbly due to unexpected political or trade developments, then Qualcomm stock may also be adversely affected.
For example, if the upcoming earnings from various companies show that global smartphone shipments in 2020 could fall, such sluggish sales of smartphones would affect QCOM stock’s chipmaking revenue.
Thus, in the next few weeks, I expect QCOM shares to trade between $80-$90 and build a base before it makes a new sustained rally.
Dividends and Valuation Are Likely to Support Its Price
Management’s shareholder-friendly policy, as evidenced by the 2.8% dividend yield, and the group’s generous stock repurchase program are likely to act as support in case Qualcomm stock declines further in the coming weeks.
It is important to remember that Qualcomm has regularly increased its dividend in the past. Therefore, investors who also pay attention to creating a passive income stream could regard any potential drop in the share price as an opportunity to buy into QCOM stock.
QCOM stock currently trades at a forward price-to-earnings ratio of 14.5, which many investors may regard as an acceptable ratio for a tech giant. In comparison, forward P/E ratios of Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA) and Texas Instruments (NASDAQ:TXN) are 7.5, 33.1 and 25.6, respectively.
Similarly, Qualcomm’s price-to-sales ratio stands at 4.1. Companies generate revenue from the sale of goods and services. Analysts prefer a low P/S multiple, ideally below 1. However, a P/S number between 1 and 2 is more common. To put the metric into perspective, the S&P 500’s average price-to-sales ratio is 2.3.
On the other hand, forward P/S ratios of Advanced Micro Devices, Nvidia and Texas Instruments are 8.6, 14.6 and 8.1, respectively.
Many investors may see these metrics as proof that the stock is not yet prohibitively priced. And if there is any short-term weakness in QCOM shares, they are likely to regard it as a good opportunity to buy into the stock.
The Bottom Line on Qualcomm Stock
As technology becomes increasingly integrated into daily life, we can expect tech stocks to lead broader markets’ growth over the new decade.
In 2020, we can expect “5G” to become a buzzword, in part driven by powerful marketing and in part by the potential benefits the new technology may offer consumers.
Qualcomm’s impressive intellectual property is expected to be used in high-end smartphones of most major manufacturers.
Thanks to its diversified revenue stream and the strength of its technological offering, I believe that QCOM stock belongs in a long-term growth portfolio. Recent quarterly reports show that the company is like to successfully transfer its current dominant market position into the upcoming 5G technology.
However, I would not advocate bottom picking if QCOM weakens in the near term. On the other hand, I find QCOM stock to be a compelling buy candidate, especially between $80 and $85. And in two to three years, I’d expect QCOM to surge to $110-$120.
At the time of writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.