Qualcomm [QCOM] has long been the world’s biggest supplier of mobile-phone chips. So it’s of no surprise that with the advent of the super-fast fifth-generation digital cellular network, it was the first major firm to develop the new breed of chips that are needed for mobile phones to operate on the network. But how will Qualcomm's share price benefit from this potentially significant growth driver?
Qualcomm’s first scalp in the race to 5G was claimed in April of this year when Apple [AAPL] abruptly settled a two-year court battle with the chip-maker. What started out with Apple suing Qualcomm for perceived unfair patent fees developed into Qualcomm countersuing Apple for patent infringement. It even accused the iPhone maker of stealing tech and handing it over to Qualcomm’s biggest competitor, Intel [INTC].
But the surprise settlement came as Intel announced it would no longer be pursuing 5G technology. With Intel retiring from the game, Apple was left with little option but to use Qualcomm chips if it wished to produce a 5G iPhone, resulting in Apple agreeing to pay Qualcomm an undisclosed fee – and sign a six-year global patent deal (Qualcomm’s business works through licensing its technology to other tech firms).
Surge of the century
The news resulted in Qualcomm’s biggest surge this century, with its share price gaining 38% in the two days following the announcement, moving from $57.18 to $79.08.
It went onto reach $89.82 in early May, just over 10 points off its all-time high of $100 that was momentarily reached at the height of the tech bubble in 2000. Qualcomm went on to close that day in January 2000 at $89.66, lower than the price reached in April 2019.
But such aggressive surges are often also fragile ones. As Donald Trump announced a new round of tariffs on Chinese goods in mid-May ¬– which brought the threat of Apple being hit hard by the trade war – much of Qualcomm’s gains were wiped out, with the firm leading the pack in tech share price dips.
Chips for everyone
The firm has since regained some momentum, making back about half of the May losses. It closed 9 September at $78.21, meaning Qualcomm’s share price is still up 37.1% in 2019.
And now, the firm has announced what could be its biggest play yet: a new series of affordable 5G chipsets that will be made for mid-priced phones, meaning that it won’t be just those paying more than $1,000 for the latest iPhone or Samsung, who are able to access the high-speed network.
Qualcomm's YTD climb
“Qualcomm have done a phenomenal job to drive the 5G ecosystem,” industry analyst Paolo Pescatore told Reuters. “It’s going faster than anyone could have ever imagined.”
It’s a sentiment echoed by Qualcomm’s president Cristiano Amon, who, alluding to the success 5G is expected to bring to the company, told Reuters: “The transition to 5G is going to be faster than earlier transitions. Now we have to bring it to everyone.”
The news comes amid struggles for Huawei, which is now Qualcomm’s only big competitor in the 5G space. Despite it proclaiming that it’s new high-end 5G chip is superior to Qualcomm’s existing Snapdragon 8 series, with continued trade tensions it’s unclear where Huawei’s customers will come from outside of its own business, which may not even be able to use the Android operating system in the near future.
However, Huawei is also Qualcomm’s biggest customer in the wider mobile-phone chip marketplace, meaning Huawei’s problems could also infect Qualcomm.
“Qualcomm have done a phenomenal job to drive the 5G ecosystem [...] It’s going faster than anyone could have ever imagined.” - Industry analyst Paolo Pescatore told Reuters
A long-term play
And due to the aforementioned trade tensions – Qualcomm makes about 65% of its revenue from China – and falling 4G demand, Qualcomm’s revenue was down 13% in Q3 2019, compared to the same period in 2018. It also issued new guidance for the fourth quarter of $4.3bn-$5.2bn, representing a 12-26% drop from its 2018 Q4 earnings of $5.8bn.
|PE ratio (TTM)||1.54|
|Operating Margin (TTM)||37.98%|
Qualcomm share price vitals, Yahoo finance, 11 September 2019
Qualcomm does nevertheless have a clear opportunity to dominate the 5G space, which will undoubtedly power growth for the business in the long-term.
It was a fact Qualcomm CEO Steve Mollenkopf brought up during the Q3 earnings release: “Our 5G design wins have doubled over the last three months, leaving us extremely well positioned as 5G ramps in early calendar year 2020,” he said.
For Mott Capital Management, Qualcomm has solid potential. Writing on Seeking Alpha in early September, the firm said: “It may be time to start getting bullish on Qualcomm again. Options activity has picked up recently with an increase in the open interest for the calls due to expire in the middle of November. Additionally, the technical chart has been trending higher, while the equity’s valuation is very compelling.”
Zacks Investment Research doesn’t share this optimism, however. It currently ranks the stock a ‘strong sell’ and named Qualcomm its ‘bear of the day’ on 26 August, with Zacks’ Daniel Laboe questioning the reliance on licensing its chips amid trade tensions.
“This company doesn’t have any systemic issues that I am afraid of other than its reliance on licensing profits,” writes Laboe.
“Qualcomm has experienced very unfortunate circumstances in the political space. It will continue to punish the firm if they are unable to work around the issues. Declining smartphone sales isn’t doing the company any favours either.”
However, of 26 analysts tracked by CNN, 12 peg Qualcomm as a ‘buy’, and ‘15’ a hold. None have issued an ‘underperform’ or ‘sell’ rating for the stock.