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Shares of chip giant Qualcomm
After reporting great earnings November 4, I see three reasons this stock has further to rise:
- 5G smartphone production to more than double
- Licensing-related legal problems in the rear view mirror
- Strong support from bullish Wall Street analysts
(I have no financial interest in the securities mentioned in this post).
Qualcomm Beats And Raises
San Diego-based Qualcomm went public in December 1991 and its shares have enjoyed a 21.1% average annual rate of return since then — despite spending years (from 2014 to 2019) in the doldrums. That’s still much better than the 7.9% average annual rate of increase in the S&P 500.
Since its March 18, 2020 low, Qualcomm’s stock has been rising steeply — receiving a booster shot from its impressive fiscal fourth quarter results.
Qualcomm reported a 73% increase in revenue to $6.5 billion — 10% above the consensus estimate and adjusted EPS of $1.45 — 24% more than Wall Street expected, according to CNBC.
Qualcomm also guided analysts to expect 26.1% revenue growth in the range of $7.8 billion and $8.6 billion — well above the $7.1 billion consensus — and adjusted EPS between $1.95 and $2.15 for its December-ending first fiscal quarter, according to CNBC.
5G Smartphone Production to More Than Double
5G will enable wireless Internet connections that are much faster — once it is rolled out. Apple’s iPhone 5G could enable wireless Internet connections that are 100 times faster than older phones, according to TheStreet.com.
Qualcomm could be a big beneficiary of demand for Apple’s iPhone 5G. According to the Wall Street Journal, Qualcomm projects that 2021 shipment of 5G smartphones will “more than double” 2020’s expected total.
This could benefit Qualcomm because one of its 5G modem chips is included in Apple’s first 5G smartphone, the iPhone 12. Qualcomm expects 200 million 5G smartphones to ship in 2020 and looks for a 150% increase to 500 million to be shipped in 2021, according to the Journal.
Licensing-Related Legal Problems in the Rear View Mirror
For years Apple and Qualcomm engaged in fierce legal battles over intellectual property. Qualcomm also struggled through disputes with Huawei and the Federal Trade Commission (FTC).
These legal problems are now mostly behind Qualcomm. After settling its Apple dispute in 2019, this quarter, Qualcomm’s results included revenue from selling its chips — including “the more expensive millimeter wave 5G format [for the iPhone 12] following years of [being] shutout as the two companies battled in the courts,” according to the Wall Street Journal.
Qualcomm settled a legal dispute with Huawei earlier in 2020 which “removed the last major holdout on its licensing business,” noted the Journal.
The chip maker also won another legal battle against the FTC which wanted to reconsider the decision to dismiss the government’s antitrust suit against Qualcomm. After a federal appeals court turned down the FTC, its “only long-shot option [is to] take the matter to the Supreme Court,” wrote the Journal.
Strong Support from Bullish Wall Street Analysts
Three Wall Street analysts are bullish on Qualcomm:
- Bank of America wrote that Qualcomm’s “stars are aligning” due to the ramping multi-year 5G cycle, the full benefit of royalties from all major smartphone and other device makers, higher chip prices, and the company’s “technology leadership,” according to CNBC.
- Canaccord Genuity — which raised its price target to $175 — agrees with much of Bank of America’s analysis and anticipates “strong earnings through F2022 and beyond,” noted CNBC.
- Deutsche Bank’s Ross Seymore argued that Qualcomm “is the ‘premier way’ to play the expansion set to take place in the 5G handset space over the next year,” wrote CNBC.
One note of caution: analysts’ optimism could be a mixed blessing. After all, Wall Street rewards companies for beating expectations for the current quarter and raising their guidance for the future ones.
If all this good news for Qualcomm means that expectations are so high that the company can’t exceed them, investors who jump in now may be disappointed. Given the long-term tailwinds propelling demand for Qualcomm’s products, that is a risk worth taking.