In 2019, Qualcomm (NASDAQ:QCOM) stock finally started to reward investors who had patience. From 2014 through 2018, QCOM stock was largely treading water, with the stock hitting a 30-month low as the tech wreck at the end of 2018 continued into 2019.
The semiconductor industry has been stuck in neutral because of the U.S.-China trade war. But in 2019, the industry and Qualcomm stock caught the first part of the 5G wave. As it specifically relates to QCOM stock, the company was finally able to put its legal dispute with Apple (NASDAQ:AAPL) in the rearview mirror. And while the resolution may be more of an uneasy status quo, it does give Qualcomm a predictable revenue stream for the next several years.
That revenue got a pleasant surprise as sales of the iPhone 11 have surpassed initial projections. But just like all semiconductor stocks, QCOM investors are waiting on the release of 5G phones because of their need for 5G modem chips.
Qualcomm May Get More Revenue Per Smartphone
In addition to new modem chips, 5G smartphones will require upgraded radio frequency front-end (RFFE) modules. However not all RFFE modules are created equally. It depends on a range of outcomes. One of those outcomes is the choice of which parts of the frequency spectrum telecom carriers will use.
Qualcomm would prefer that carriers use mmWave. This covers the high-frequency spectrum. The other alternative is Sub-6. This covers between low-band and mid-band spectrum. So, what’s the difference?
All things being equal, mmWave offers higher data transfer speeds. But they are more expensive. This is a pro and a con for Qualcomm stock. The good news is that mmWave devices require multiple antennas as opposed to Sub-6 devices, which require only one.
More parts equal more revenue for Qualcomm.
The U.S. Is the Only Country That Supports Both Sub-6 and mmWave
At their recent Analyst Day, Qualcomm emphasized that at this stage in its development, 5G is off to a much faster start than 4G. While this is largely seen as a benefit to Qualcomm (and it probably will be), it may also be a tide that rises all boats. Right now, there are ten times more operators offering 5G service than there were at the same point in the launch of 4G. And that number is only expected to rise.
But the United States is to date the only country that supports mmWave. Qualcomm believes that Japan and South Korea will also adopt mmWave in 2020. And the company is also optimistic that a large number of European countries, plus Brazil and Russia will also launch networks that support mmWave.
But what if they’re wrong? If countries decide that mmWave is not a cost-effective solution, it can dramatically reduce Qualcomm’s expected revenue. Could this happen? The answer is yes, particularly since mmWave requires a much higher infrastructure cost.
But Is Support for mmWave Waning in the U.S. as Well?
The larger problem is that some U.S. carriers, specifically T-Mobile (NASDAQ:TMUS) and Verizon (NYSE:VZ) are even having some doubts about mmWave. That’s because the benefits of 5G, notably the faster data speeds, while obvious to Qualcomm are not as obvious to the carriers who are on the hook for building out the infrastructure.
An executive at T-Mobile said that “millimeter wave (mmWave) spectrum has great potential in terms of speed and capacity, but it doesn’t travel far from the cell site and doesn’t penetrate materials at all. It will never materially scale between small pockets of 5G hotspots in dense urban environments.”
Is Qualcomm Stock a Buy?
I believe QCOM stock is a buy in the short term. The 5G rollout is creating too big of an opportunity.
But investors need to closely watch to see if other countries, including the U.S., “catch the wave.” If they do, the stock will have a unique catalyst that should launch it higher. However, if they don’t, more muted expectations for Qualcomm stock are in order.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.