Ever since it topped $94 exactly one month ago, Qualcomm (NASDAQ:QCOM) stock gave way to selling pressure. For investors with a long-term time horizon, buying the stock on any dip makes sense. The chip giant has significant growth prospects ahead in 5G. And the earnings from licensing are clearly strong, too.
So what other reasons do investors have for holding QCOM stock?
Qualcomm reported strong Q4 results, with non-GAAP earnings of 78 cents a share. It reported earnings above the high end of its guidance range due to strong licensing performance. Plus, investments in 5G over the last few years are now paying off. As QCOM notes in its latest Q4 earnings report call, 5G is significantly more complex than 4G; it has “new and dense network architectures, high performance basebands, advanced RF front end designs, increased processing requirements,” among other standout qualities.
In FY 2020, Qualcomm stock should outperform the semiconductor sector as it hones in on its key priorities. First, it will keep executing on 5G with its global partners. In fact, according to Qualcomm, “[t]he number of OEMs and operators launching 5G products and services continues to increase throughout the year.” This progress should continue throughout the next year. In Q4/2019, Qualcomm had “over 40 OEMs and over 30 operators launching or announcing 5G products.” It effectively doubled its OEM and operator costs since the beginning of the year.
In China, management said on the conference call that all three mobile operators launched 5G services. 5G base stations will total 130,000 by the end of the year but will balloon to around 1 million deployments by the end of 2020. This is huge. At 1 million, that is 10 times the scale of the entire network of a large U.S. operator.
Huawei Dispute Not Yet Resolved
Qualcomm’s QTL (Qualcomm Technology Licensing) revenue will in the range of $1.3 billion to $1.5 billion. And Qualcomm “expect[s] revenues to be in the range of $4.4 billion to $5.2 billion.” This strong outlook comes despite the fact that the company “does not include any royalty revenues from Huawei”, and it is still “[pursuing] a negotiated resolution of the licensing dispute.” So, any agreement with Huawei could send QCOM stock back to yearly highs.
Qualcomm did not report any developments in the negotiations, so it is too early to predict any deal will happen anytime soon.
Outlook in 5G
Qualcomm’s forecasts for 5G phone sales doubling in 2021 is another reminder of why investors should consider the stock. With 450 million 5G shipments in 2021 and 750 million in 2022, its IP licensing business will fare well. It has over 75 agreements in place since starting its 5G licensing program. Its revenue forecast probably reflects its bullish outlook on 5G shipments. So, chances are also good that QCOM stock already prices in 5G phone sales.
The conservative investor may forecast revenue growing 6% CAGR. With an EBITDA margin of 31 in a 5-year DCF revenue exit model (per finbox.io), QCOM stock is worth ~$94. This fair value is consistent with the analyst price target as reported on tipranks.com. Based on 17 analysts offering a one-year price target on Qualcomm stock, the average price target is ~$97.
Qualcomm stock is benefiting from a strong Qorvo (NASDAQ:QRVO) earnings report and a lack of litigation worries. But if its unfavorable pricing practices come to the forefront again, its stock could pull back again. Still, the stock pays a decent dividend that yields around 3%. And its forward price-to-earnings ratio is modest at around 14X. Buying the stock on any weakness should pay off in the long-run as the 5G rollout continues in 2020.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.