Last month I opined that Qualcomm (NASDAQ:QCOM) stock has priced in the near-term market opportunity. The key reason behind my argument is the need for 5G infrastructure, which will take time. Today, I also believe that QCOM stock will be impacted by a competition headwind.
Of course, the company remains a clear leader in the chipset market. But the company’s projected growth can be impacted by the competition factor. This coverage will elaborate on this view as I maintain a “neutral” rating on Qualcomm stock.
Before discussing the concern, I would quickly like to talk about the potential market opportunity. It is expected that the global 5G chipset market will grow at a compounded annual growth rate of 41% to reach $22.9 billion by 2027.
Further, QCOM expects global smartphone makers to ship 450 million 5G handsets in 2021 and another 750 million in 2022. With this big market opportunity, there will be companies eyeing a slice of the pie.
Qualcomm Faces Increasing Competition
We need to look at the market share of top original equipment manufacturers to understand the competition factor specific to 5G handsets. For the third quarter of 2019, Samsung reported 21% share in global smartphone shipments. Huawei reported a market share of 18%.
With a global market share of 39%, these two companies are looking at reducing reliance on procurement of external chips. Huawei describes the Kirin 990 chipset as the “as the first all-in-one 5G system on a chip.” The company believes that the chip is superior to those of Qualcomm and Samsung.
Samsung has also commenced production of its own 5G chips. More than 70% of Samsung’s smartphone shipments in 2020 are expected to use Exynos chipsets.
MediaTek has also been making inroads in the chipset market. MediaTek is estimated to have a market share of almost 40% in emerging markets. This is significant as emerging economies accounts for one-third of the smartphone market. MediaTek chipsets are well positioned to continue growing with a lower market price.
Three Chinese OEM manufacturers, Oppo, Xiaomi and Vivo, have a combined global smartphone shipment market share of 25%. MediaTek is well positioned to gain from chipset sales to these manufacturers. It is worth mentioning here that the company will be launching 5G chipsets for mid-range smartphones on Nov. 26.
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) are just some of the companies that are building their own chips. This will help companies reduce costs and their reliance on vendors.
I would again reiterate that Qualcomm will remain the market leader in the coming years. However, given the chipset market opportunity (beyond 5G handsets), the company will face increasing competition. This will impact QCOM’s growth visibility to some extent.
My Final Verdict on Qualcomm
Qualcomm’s growth potential from 5G is not limited to smartphones. It is likely that 5G will drive growth in other industries and Qualcomm is targeting the automotive, healthcare and industrial internet of things segments, among others. Therefore, the opportunities are significant and will provide steady long-term growth.
For dividend investors, Qualcomm stock remains attractive. The company has paid $10 billion in dividends in the last three years in addition to $26 billion in share repurchases. With the company planning to increase dividends in the coming years, Qualcomm stock will be worth considering on declines.
Overall, factors of slower-than-anticipated growth in 5G penetration and competition in the chipset industry are medium-term headwinds for Qualcomm stock. However, as 5G growth gains traction (possibly beyond 2020), Qualcomm will be worth considering.
I want to conclude by mentioning that QCOM has invested $17 billion in research and development in the last three years. With the company high on innovation, I am not bearish on the business or the company’s leadership position. However, as other players make inroads in the chipset industry, Qualcomm will see some impact on its potential growth.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
