Tech stocks have had a mixed reaction to the novel coronavirus-induced bear market. As a sector, tech shares have significantly outperformed the broader market; the NASDAQ has been the best major index year-to-date. On the other hand, a lot of particular individual businesses like Qualcomm (NASDAQ:QCOM) are suffering serious consequences from the current economic crisis. Qualcomm stock is one such example.
The company’s business model, with a particular reliance on the Chinese market and the rollout of expensive 5G infrastructure, is caught in the wrong place at the wrong time for this sort of economic shock.
This isn’t great timing from a momentum perspective either. Qualcomm had already had a pretty poor year in 2019, operationally. Yes, the stock did well thanks to wins in patent battles against Apple (NASDAQ:AAPL). But actual operating results were lackluster thanks to the trade war and 5G delays.
2020 was supposed to be the year that Qualcomm triumphantly returned to growth. Now, by all accounts, that will have to wait until 2021.
On top of that, Qualcomm suffered another setback in March as one of their larger investments went bust. That added to the drumbeat of negativity. Despite all the drawbacks, however, Qualcomm’s core licensing business remains robust and cash flows are strong. As a result, Qualcomm rewarded its shareholders with a dividend hike in March despite all the troubles. It’s a reminder that Qualcomm’s prospects are still strong even with all the setbacks over the past year.
Satellite Ambitions Dim
Given all the coronavirus news, there’s plenty of other things happening that are flying under the radar. We saw an important development in the satellite industry a few weeks ago, for example. Satellite communications company OneWeb declared bankruptcy. OneWeb said that it was unable to raise funds to continue operations and thus had to seek court protection from creditors. It blamed the coronavirus for making it impossible to find additional investors.
OneWeb was a key rival to SpaceX’s Starlink division. OneWeb intended to provide exceptionally fast broadband service via satellite. It had already put 74 satellites into space and shown the capability to provide 400Mbps service with minimal latency.
OneWeb even led SpaceX in the satellite race a few years ago. It obtained an FCC clearance for its plans ahead of SpaceX, for example, and eventually planned to reach 720 orbiting satellites, which would have given it a dominant position in the industry.
Unfortunately, those dreams are dashed, and Qualcomm will end up as a big loser. For one thing, Qualcomm had invested heavily in OneWeb. Qualcomm was a lead funder of OneWeb’s 2019 financing effort, along with Softbank, the government of Rwanda, and others. Collectively, they chipped in $1.25 billion into OneWeb last year, yet it is already bankrupt now. For Qualcomm, that was a top-up investment, as it had already been invested in OneWeb dating back to 2015.
All in all, it’s a disappointing turn of events. Qualcomm had owned 16% of OneWeb, according to its bankruptcy filings; that stake was once worth hundreds of millions of dollars. Adding insult to injury, Qualcomm had partnered with OneWeb and likely would have earned a great deal of business selling chips to service OneWeb’s telecom ambitions. It’s unclear if Qualcomm will be able to earn that business from SpaceX or other surviving rivals in the space.
The Silver Lining: A Bigger Dividend for Qualcomm Stock
It’s been a brutal month for income investors. Tons of companies have been slashing their dividends or suspending payments altogether. Plenty more dividends are in the line of fire as well, such as several firms with risky payouts.
That said, Qualcomm is one company that you don’t need to worry about. In March, despite dismal market conditions, Qualcomm announced that it will be increasing its quarterly dividend. Going forward, Qualcomm will pay 65 cents every quarter. That is a 5% bump from its previous payout. With the dividend increase, along with the share price decline, Qualcomm now yields a juicy 3.41%.
Qualcomm Stock Verdict
I’ve been a long-time Qualcomm stock owner. And I’ve held onto my position despite the economic shock we’ve seen so far in 2020. Good companies will get through this situation.
That said, do keep your expectations in check for the next few quarters in general, and with Qualcomm stock in particular. 5G will eventually get back on track and Qualcomm will return to growth. There will be further delays, however, in the interim. Companies like OneWeb are going bust, which reduces spending across the communications space. Meanwhile, 5G rollouts have been slowed even more as companies conserve cash.
Make no mistake, there is real damage occurring to the economy that won’t be fixed merely because the quarantines finally end. The loss of OneWeb, for example, is a hit to Qualcomm’s long-term value, taking away one small but potentially lucrative upside option if that business had worked out.
Qualcomm remains a solid hold and could be a good strategic buy at this price for long-term investors. The next few quarters could still be choppy, however.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned QCOM stock.
