In winning its case against the Federal Trade Commission (FTC), Qualcomm (NASDAQ:QCOM) became the dominant supplier in 5G. Should QCOM stock investors cheer the decision?
A three-judge panel of the Appeals Court in the Ninth Circuit ruled that Qualcomm’s control of patents essential to mobility is not an antitrust violation. This means it can enforce its policy of “no patent, no chips,” through which it has dominated the mobile chip business, into the next decade.
The decision upended tech industry practice, which holds that commonly agreed-upon standards shouldn’t be under one company’s control. It’s seen as mainly aimed at China, which has been trying to get into the equipment business through Huawei.
The decision means that, with the Trump Administration refusing to let Huawei use any U.S. content, Qualcomm has checked it.
But what does that mean for shareholders?
Legal Exhaustion Hanging Over QCOM Stock
Qualcomm has been a law firm masquerading as a tech company for half a decade. It has fought, and won, against huge competitors like Apple (NASDAQ:AAPL) and Intel (NASDAQ:INTC). It has also successfully defied multiple governments, including China’s, Korea’s and (now) the U.S.
Assuming the losers don’t win an appeal before the full U.S. Appeals Court, something Intel and automakers are lobbying for, Qualcomm is free to fly.
What does that mean for QCOM stock holders? Maybe not as much as you think.
Of the last five analysts to look at Qualcomm on Tipranks, only two said buy it. Most see revenues growing just 15% next year, even while profits grow 50% to $1.60/share each quarter. The average price target is just 5% ahead of where it was trading Sept. 15.
Not Making Phones
With the Machine Internet, 5G and the auto market all in its future, the real mystery of Qualcomm is why it’s only up 32% for 2020, with most of the gain coming right after its successful appeal.
The answer is that Qualcomm is a chip designer, not a manufacturer. It’s an ingredient in chips, which are ingredients in phones. It’s not a phone maker.
Last year most of Qualcomm chips were made by Taiwan Semiconductor (NYSE:TSM). Now the company is moving to Samsung (OTCMKTS:SSNLF). That process is already underway.
Unlike microprocessor makers, including Intel, that are locked into TSMC because of its early mastery of 7 nanometer fabrication, Qualcomm has choices. It may move back to TSMC for its next chip.
The processing side of Qualcomm Snapdragon chips are based on designs from ARM Holdings, which Nvidia (NASDAQ:NVDA) is now in the process of buying. The latest silicon has roughly 15% better performance than that which it replaces, so it’s the 5G that’s the story, not the processing. Qualcomm should have 5G chips available for budget smartphones next year.
On the carrier side, Qualcomm is supporting efforts to separate hardware from software, the so-called OpenRAN movement. The result will be incremental new business, but greater competition as (unlike with phone chips) there will be many suppliers.
The Bottom Line
While Qualcomm’s price-to-earnings ratio of 49 seems high on the surface, it can afford its dividend of 87 cents/share. This yields almost 2.3% at a time when the 30-year government bond yields just 1.4%.
Compared with Nvidia or Advanced Micro Devices (NASDAQ:AMD), the other big U.S. chip designers, moreover, the stock just looks cheap. Nvidia is now priced near 100x earnings, AMD near 150x.
Assuming Qualcomm doesn’t suffer yet-another court reversal, then, its current price is attractive. Qualcomm has become the U.S. champion in 5G, and while that’s more of a legal position than a technology one, it’s good enough for me.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in QCOM, AAPL, INTL, TSM and NVDA.
