Shares of Qualcomm (NASDAQ:QCOM), like equities in many other chipmakers, have been on a veritable roller-coaster ride in 2020. But the uncertainty plaguing markets in March has all but disappeared, and QCOM stock is now compelling enough from a risk-reward perspective to qualify as a solid buy.
The San Diego, California-based semiconductor giant, which boasts a valuation around $100 billion, is a solid blue-chip stock to own for the long-run. The sudden and unexpected impact from coronavirus has impacted business on a short-term basis — few companies were unaffected, of course — but that only delays one inevitable catalyst for the stock that shareholders can look forward to: 5G technology.
QCOM Stock: Powering a 5G Future
A long-running dispute with smartphone giant Apple (NASDAQ:AAPL) was settled last year, removing a major overhang for Qualcomm shares as the two tech giants worked out a win-win long-run partnership. Apple agreed not only to license Qualcomm’s technology for at least six years, it has an option to extend for an additional two at the end of the contract. Plus, QCOM inked an agreement to be one of Apple’s key semiconductor suppliers as part of the agreement.
For Qualcomm, which earns royalties every time products using its patented technology are sold, getting Apple on the same page is a huge sigh of relief. Qualcomm’s cash cow patents mean it collects a fee every time a device using its technology to connect to wireless networks is sold.
The coming transition from 4G to 5G wireless technology should be a meaningful boon to QCOM, which owns substantial patents relating to that tech as well. Apple is widely expected to sell the first mass-market 5G-compatible smartphone in 2020, and hovering lawsuits with Samsung over its patent portfolio have also been resolved.
If you’re a believer in the continued success of Apple, which has built up arguably the most impressive closed-end consumer tech ecosystem in the history of the world, then you’re already well on your way to being a Qualcomm bull. The wider market certainly believes in the Cupertino, California-based smartphone giant, with shares recently hitting new all-time highs once more as investors bet on a resurgence in sales as the global economy re-emerges from the coronavirus chaos.
Pent-up demand and a delayed upgrade cycle should also benefit Apple, and in turn, Qualcomm.
Returning to the 5G thesis — one both the company and Wall Street analysts recognize as a multi-year boon for Qualcomm’s business — some experts expect the dollars per handset Qualcomm collects to jump anywhere between 25% and 50%, as the transition from fourth-generation to fifth-generation comes to pass.
The number of devices connected to wireless networks should also shoot up dramatically over time with 5G, enabling the true Internet of Things revolution that’s long been discussed to come to pass. The expansion of the overall market is expected to coincide with increased opportunities for Qualcomm to earn that all-important licensing revenue.
To gain real perspective on why Qualcomm’s rock-solid patent portfolio is so valuable, all one needs to do is look at the latest quarterly numbers. The Qualcomm CDMA Technologies Segment (QCT) is the capital-intensive part of the business, and where sales of the physical circuits themselves fall. The other part of the business is Qualcomm Technology Licensing, or QTL — the piper you must pay if you’re a global tech company utilizing the company’s ubiquitous patents.
In the second fiscal quarter of 2020, QCT pulled in revenue of $4.1 billion, essentially quadrupling the $1.07 billion top-line it saw from QTL. But the outsized margins of the licensing business, where pretax margins came to 63% vs. 16% for QCT, meant the QTL segment actually came out more profitable than QCT.
Bottom Line
To be clear, QCOM stock isn’t some up-and-coming tech name with the potential to triple in a year — although there are plenty of riskier names around for investors willing to take that leap. This is a $100 billion giant with staying power, a strong secular trend in 5G that should propel it into the future, and a long-term deal with Apple that’s a license to print money.
That’s why I rate Qualcomm shares a “buy” and give them an overall rating of “B.” A 2.9% dividend yield makes it a pretty good income stock to boot, and the knowledge that the company will be around through thick and thin, especially after all the tumult of 2020, should offer a peace of mind that only some of the largest global players can these days.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
