The fiscal year 2020 is being talked about as the year of 5G technology. Among companies, Qualcomm (NASDAQ:QCOM) is likely to one of the biggest beneficiaries of the impending 5G revolution. Qualcomm stock started FY2020 on a high and even touched $96.20. However, the rally has failed to sustain and Qualcomm stock trades at $83.1, which is 13.6% lower as compared to recent highs.
Even with the correction, I would advise investors to avoid fresh exposure to Qualcomm stock. Of course, 5G will be a game-changer. Not just in 2020, but in the coming decade. That being said, growth can be slower than expected in the initial years of launch. Qualcomm is potentially discounting this factor.
In the foreseeable future, the coronavirus from China is likely to impact 5G growth. With the outbreak spreading beyond China, the first half of 2020 can potentially be weak for 5G related companies.
As an example, China Mobile has postponed installations of base stations. Beijing Mobile also opines that 5G construction plans in FY2020 will “definitely be affected.”
Even in India, it’s being speculated that the government will have a difficult time in auctioning the “costly” 5G spectrum before early 2021. Economic headwinds due to the coronavirus would impact the auction process and delay 5G implementation.
Coming back to Qualcomm, the company has already lowered its earnings guidance for the second quarter of 2020. The company believes that there is “uncertainty around the impact from the coronavirus on handset demand and supply chain.”
This can keep Qualcomm stock depressed. Also, I would not be surprised if there are further downward revisions to the earnings guidance.
Infrastructure Issues Will Impact 5G Growth
The uncertainty related to the coronavirus is likely to impact growth in the next few quarters. However, I believe that 5G rollout can be slower than expected with infrastructure issues being the key challenge.
Cliff Kane, CEO of Cleareon Fiber, a network service specialist, is of the opinion that the rollout of 5G is “not going to be a profound impact this year or next year.” The years talked about are FY2019 and FY2020.
Similarly, reports suggest that 5G rollout is slower than expected in the United States. Again, one of the key challenges is infrastructure issues. Telecom companies want more clarity on potential profitability before investing in new 5G infrastructure.
It is also worth noting that 5G signals travel a short distance and therefore 5G requires is a much denser network. This will make penetration in semi-urban and rural areas a big challenge.
Therefore, my view is that even without the coronavirus factor, 5G growth would have been slower than expected.
The Long-Term Growth Outlook
My focus has been on challenges for the 5G rollout in 2020 and possibly in 2021. However, I have no doubt that 5G technology will continue to grow in the coming years.
To put things into perspective, 5G is expected to enable $13.2 trillion in global economic output by 2035. It is worth noting that the adoption of 5G is not just limited to mobile phones. Qualcomm believes that the future of cloud and AI will be strongly aligned with 5G.
Therefore, 5G will see inroads in a wide range of industries that include automotive, agriculture, utilities and manufacturing. Just as an example, utilities can benefit “from the MIoT and MCS capabilities of 5G for smart metering and smart grid automation.”
Similarly, in the automotive industry, 5G can accelerate the adoption of autonomous cars. These self-driving machines are expected to generate gigantic amount of data. It’s 5G that can accelerate the transfer of these data.
Concluding Thoughts on Qualcomm Stock
Qualcomm is among the early movers in the 5G revolution and the company stands to benefit in the coming years. The integration of 5G with technologies like cloud, AI and IoT will translate into strong growth for Qualcomm.
However, Qualcomm stock has been sliding relatively sharply in the near-term and the reason is potential headwinds in 2020. With broad markets remaining jittery, it makes sense to avoid fresh exposure to Qualcomm stock.
In the coming weeks, there will be further clarity on the extent of a slowdown in the global economy due to the coronavirus outbreak. There will also be clarity on supply chain disruptions and its impact on 5G growth potential for 2020.
These factors can keep the Qualcomm stock volatile with a downward bias. I therefore advise a “wait and watch” approach.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
