Conversations about 5G ramped up considerably in 2019, but the extensive rollout of the next-generation connectivity platform will happen in 2020. Predictably, there has been talk about which stocks are best-suited for the dawn of 5G, a conversation that includes familiar names, such as Apple (NASDAQ:AAPL), Verizon (NYSE:VZ) and AT&T (NYSE:T), among others.
Up 56% in 2019, Qualcomm (NASDAQ:QCOM) could prove to be a winning 5G stock. Qualcomm is at the epicenter of the 5G upgrade cycle. Remember, if an investor is willing to bet on Apple as a 5G upgrade play, (and it’s not a bad wager to consider) Qualcomm certainly merits consideration because it’s the dominant producer of 5G modem chips that handset makers need.
Due to the complexities involved with the move to 5G, including antennas and other gear needed to make the system go, Qualcomm could have some pricing power in 2020.
“The need to support higher frequencies, lower latency requirements, higher downlink and uplink capacity are increasing the complexity of a 5G baseband relative to 4G, extending Qualcomm’s leadership position, particularly in relation to mmWave enabled smartphones,” said J.P. Morgan’s Samik Chatterjee in a recent client note. “We believe the additional capabilities in a 5G baseband will provide Qualcomm with incremental content growth opportunities, ranging from a few dollars in low-end 5G handsets to $10-$15 in premium handsets.”
Big Business
There’s no denying 5G is going to be big business for Qualcomm. By fiscal 2022, smartphone chips could account for $18.5 billion of annual sales for the California-based company, with 5G-related revenue accounting for two-thirds of that tally.
As Qualcomm itself points out, 5G adoption has potentially massive implications for economies around the world and a variety of next-generation technologies.
“Through a landmark 5G Economy study, we found that 5G’s full economic effect will be realized across the globe by 2035, supporting a wide range of industries and potentially producing up to $12 trillion worth of goods and services,” according to the company. “The study also revealed that the 5G value chain (OEMs, operators, content creators, app developers and consumers) could alone generate up to $3.5 trillion in overall aggregate revenue by 2035 and support up to 22 million jobs, or more than one job for every person in Beijing, China.”
Broadly speaking, Wall Street agrees that the 5G opportunity will move the needle for Qualcomm stock.
Bank of America Merrill Lynch analyst Tal Liani said that, “starting next year, if all iPhone models include 5G capabilities, Apple could contribute nearly $4 billion in cumulative sales to Qualcomm by fiscal year 2022. His model assumes $20 per Qualcomm 5G modem sold to Apple,” reports Barron’s.
The enthusiasm for Qualcomm comes as the shares have lagged the widely followed PHLX Semiconductor Index (NASDAQ:QCOM) by about five percentage points this year and with the stock residing more than 10% below analysts’ average price target.
The Bottom Line on Qualcomm
Although it isn’t fully appreciated yet by investors, Qualcomm’s 5G catalysts can extend well beyond handsets and telecom gear, potentially providing longer-ranging tailwinds for the stock. For example, the company is using 5G as a runway for forging into the industrial artificial intelligence arena.
Qualcomm Ventures, the company’s venture capital arm, recently invested in IoT startup Augury, which uses IoT sensors to anticipate maintenance needs before it’s too late, saving customers money in the process.
“Qualcomm Ventures believes the investment will help jumpstart the emergence of wireless connected factories, shipyards and other industrial operations — all of which are expected to accelerate with the rollout of new 5G networks,” reports The San Diego Union-Tribune.
Speaking of IoT, that’s another underappreciated catalyst for Qualcomm stock. And, trading at 14.5 times analysts’ average 2020 earnings estimate, QCOM stock is more reasonably priced than many of its semiconductor peers.
“The firm has done a solid job of controlling operating expenses in recent years, and we expect operating margins for Qualcomm stabilizing in the mid-20s,” according to Morningstar research. “Furthermore, Qualcomm has strengthened its offerings at the flagship smartphone level while also branching off into new growth vectors in automotive and Internet of Things that require low-power and high-performance chips as well as low-latency and speedy connectivity, which is right in Qualcomm’s wheelhouse.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
