Qualcomm (NASDAQ:QCOM) stock trended higher in the last quarter of 2019. However, QCOM still trades at flat levels compared to May 2019. Therefore, the last two quarters have been sideways in terms of stock movement. I believe that Qualcomm has priced in the near-term 5G opportunity. However, there is no doubt that QCOM stock is attractive from a 24-36 month investment horizon.
I want to start with a quick note on the valuation. Qualcomm stock trades at $88 and based on 2019 earnings per share of $3.59, the price-to-earnings ratio is 24.7. For financial year 2020, analysts expect earnings growth of 16.4%. This implies a price-earnings-to-growth ratio of 1.5. Clearly, QCOM stock is not inexpensive. This is one reason to advise gradual accumulation on declines instead of a big plunge in the stock.
It is important to add here that analyst estimates suggest earnings growth of 48.5% for fiscal 2021. I believe that 2021 and beyond will be the time when real growth traction is witnessed related to 5G. This makes QCOM attractive when considering a 24-36 month horizon.
Qualcomm Makes 5G More Accessible
One of the challenges in the overall 5G launch is to keep costs affordable, be it mobile operator charges or the cost of handsets. The reason is that China and India have a combined population of 2.5 billion and represent a big long-term market.
In September, Qualcomm announced new chips to make 5G handsets more affordable. With several handset makers already on board to use the chip, there is potential for growth acceleration. The handsets with these chips will launch in the second half of 2020. This makes a strong case for earnings growth in 2021.
Qualcomm is also rolling out 5G in India in 2020. The initial focus is likely to be on non-telecom deployment of 5G services. Therefore, be it emerging markets or developed markets, 5G has a much broader application. The true potential will be unleashed in the next three to five years.
I want to add here that Qualcomm has launched a $200 million fund for India, China and Southeast Asia. It’s a venture capital fund to invest in 5G startups. The point I am making is that a focus on developing markets will be a potential long-term game changer.
Challenges Can Impact Growth Outlook
There is little doubt that Qualcomm is a leader when it comes to bringing innovative 5G technology. However, infrastructure concerns can impact the likely growth estimate.
Craig Moffett, a leading telecommunication analyst, is of the opinion that “spectrum — the range of frequencies an operator network is allowed to radiate — is not sufficient enough in the U.S. to completely support 5G mobile.” He further opined to CNBC that 5G has zero chance of being a ubiquitous technology by 2021.
Similarly, Europe is lagging behind in 5G adoption due to challenges that include regulatory hurdles and lack of spectrum. Furthermore, Qualcomm is focused on non-telecom 5G deployment in India. For mobile deployment, India has challenges that include awaited allocation of 5G spectrum and the high cost of 5G spectrum for mobile operators.
The key point being that the total addressable market is significant, but it will be years before some markets reach inflection point.
My Final Thoughts on QCOM Stock
Qualcomm certainly has a big market opportunity when it comes to 5G.
However, in all probability, the near-term 5G earnings upside is priced in QCOM stock. Long-term investors can consider buying on dips, but I expect real earnings growth traction only in 2021 and beyond.
I therefore remain “neutral” on QCOM stock for the foreseeable future.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
