Is 5G enough for QCOM?…

Qualcomm is a leading technology company that primarily deals with developing wireless technologies. The company’s products are used in mobile devices and other wireless products, including network equipment, broadband gateway equipment, consumer electronic devices, and other connected devices. Its products and technologies are also used in automotive, computing, IoT and networking.

Qualcomm is a pioneer in 3G and 4G wireless technologies and a leader in 5G wireless technologies. It is a global leader in the development and commercialization of digital communication technologies called CDMA and OFDMA, including LTE. The company has three reportable segments – QCT is the largest, accounting for 60% of total revenues (Qualcomm CDMA Technologies) semiconductor business and QTL (19% – Qualcomm Technology Licensing) licensing business. Its QSI (1% – Qualcomm Strategic Initiatives) segment makes strategic investments.

Investment Data

Revenue Growth & Market Exposure

Qualcomm’s revenues comprise of sales from integrated circuit products and intellectual property licensing, including patents and other rights. QTL licensing revenues include license fees and royalties. Royalties are based on sales of products using Qualcomm’s licensed intellectual property or a fixed license fee.

Qualcomm owns substantial intellectual property related to these technologies, including patents, patent applications, and trade secrets. The company has a massive competitive advantage as companies in the mobile industry that use CDMA-based or OFDMA-based technologies will require a license or other rights to use Qualcomm’s patents. The company’s products and solutions are used by leading companies in wireless voice and data communications (Apple, Samsung, Xiaomi, etc.), networking, application processing, multimedia and GPS functions.

Qualcomm has played a leading role in developing system-level inventions serving as the foundation for 3G, 4G, and 5G wireless technologies. The future releases of 5G are expected to further expand and create new business models and services, such as autonomous vehicles, artificial intelligence-based platforms, and other industrial applications. Increased usage of wireless devices worldwide and the demand for data services require continuous innovation. Qualcomm continues to heavily invest in research and development and has developed and also acquired significant related intellectual property and a large portfolio of U.S. and foreign patents. The patents have broad coverage in many countries, including Brazil, China, India, Japan, South Korea, Taiwan, and Europe. Qualcomm’s patent portfolio is the most widely and extensively licensed in the industry, with more than 300 licensees.

Qualcomm’s mobile handset platform; adjacent platforms like automotive, computing and IoT; licensing and other long term opportunities like Cloud, Edge AI should continue to drive future revenue growth.

Dividends

Qualcomm is a Dividend Achiever. The company has an annual average yield of 2.6% and a payout ratio of 68%. It last raised its dividend by more than 8%. Its dividend growth is also impressive at more than 14% CAGR in the last decade. Qualcomm has cumulatively returned $89.5 billion to stockholders as of September 2019. It still has $7.1 billion remaining authorization for repurchases under its stock repurchase program. The company’s strong balance sheet and investment-grade ratings provide ample flexibility to its capital allocation program. Qualcomm is also eyeing opportunistic acquisitions and also has a successful integration track record.

Qualcomm’s strategy is to invest in fundamental technologies that enable industries to go cellular and then scale it globally. The company’s 5G leadership comes from a three-decade-long extensive research. With a growing 5G adoption, the company is favorably positioned to earn more revenue per device and benefit from growing opportunities as cellular roadmap intersects with other industries. It should also gain from its R&D and large mobile technology investment in other industries as well as 5G+AI future. More than 75 5G license multi-year anchor agreements have already been signed to date.
The company is targeting to reduce its annual costs by $1 billion. It has already achieved substantially all of this target in fiscal 2019. Qualcomm is positioned to grow faster than the total serviceable addressable opportunity driven by 5G and diversified revenues across products and industries. It is well positioned to drive higher shareholder returns on the back of 5G leadership, integrated technology portfolio and attractive long term financial profile.

Competition

The wireless communications industry is characterized by rapid technological change, evolving industry standards, and frequent product innovation. Qualcomm’s current competitors include companies such as Broadcom, Cirrus Logic, Cypress Semiconductor, HiSilicon, Intel, Marvell, Maxim, MediaTek, Microchip Technology, Murata, Nordic Semiconductor, Nvidia, NXP Semiconductors, Qorvo, Realtek Semiconductor, Renesas, Samsung, Sequans Communications, Skyworks and Spreadtrum Communication.

Bottom Line

Qualcomm’s inventions and licensing program have played an integral part in the evolution of the mobile industry. The 5G network deployments and device launches are expected to increase over the next several years and Qualcomm is on the cusp of multi-decade 5G transformation. As the world’s leading wireless technology innovator, the company is in a good position to gain from the scale and pace of innovation in the mobile industry.

With 5G being taunted as a major game changer, it should help QCOM but it’s a competitive market and I am concerned QCOM has struggled keeping up with the S&P 500. If you are looking for a quick profit, you may have opportunities in the swings but it’s quite the roller coaster and below the S&P500 performance for a long term investments. I say pass for now.