Qualcomm (NASDAQ:QCOM) stock popped above $100 in late July for the first time since the dot-com bubble after the chipmaker reported third-quarter numbers that while underwhelming, were accompanied by a big fourth-quarter guide and bullish news that Qualcomm has settled a long-running licensing dispute with Huawei.
Source: Xixi Fu / Shutterstock.com
The big takeaway here is that, with Huawei and Apple (NASDAQ:AAPL) both back in Qualcomm’s licensing business, the chipmaker is ready to report record numbers in 2021/22 amid the widespread proliferation and global standardization of 5G coverage.
Those record numbers will keep QCOM stock on a winning path.
So, don’t fade this rally. Stick with it. QCOM stock is only going higher over the next 12+ months.
Qualcomm Has All Its Guns Back
Over the past several years, Qualcomm’s dominant smartphone chip licensing business has come under scrutiny for monopolistic practices, with many former customers – like Apple and Huawei, two of the world’s largest smartphone makers – actually “boycotting” the business and refusing to pay royalties.
But, over the past 16 months, this dynamic has been flipped on its head.
As it turns out, 5G chips aren’t easy to make and Qualcomm is the best in the world at doing so for smartphones. So, despite their best efforts, Apple and Huawei haven’t been able to build out their own 5G chips for their smartphones. To that end, they’ve been forced to settle their disputes with Qualcomm, at favorable terms to Qualcomm.
Apple dropped all litigation in April 2019, paid Qualcomm a huge lump-sum payment and agreed to a multi-year licensing partnership with the chip maker.
Huawei did the same in July 2020. The company has dropped all litigation, paid Qualcomm a $1.8 billion lump-sum payment for past royalties and has agreed to a multi-year licensing partnership with Qualcomm.
In other words, Qualcomm now has all its guns back, right ahead of the company’s biggest macro catalyst in decades.
5G Tailwinds Will be Huge
There’s no doubt about it. 5G will transform our world.
Of course, there will be a huge smartphone upgrade cycle as consumers globally rush to buy new phones that are 100-times faster with a huge decrease in latency.
But that’s really just the tip of the iceberg for 5G.
Over the next five years, 5G will enable significant advancements in things like edge computing, machine learning, automation and much more, unlocking huge opportunities in the IoT, self-driving, robotics and AI markets. I’m talking a whole new era of smart devices, where things like smart cars, smart appliances and smart speakers are ubiquitous. I’m talking self-driving ride-sharing services, food-making robots, delivery drones and intelligent industrial parts.
5G will make all of those things a reality, and Qualcomm finds itself at the epicenter of this industry.
As such, it’s fair to say that – with all of its guns loaded – Qualcomm (and QCOM stock) is due for big growth over the next several years.
QCOM Stock has Upside Potential
My numbers suggest that QCOM stock remains reasonably valued relative to the company’s huge 5G opportunity.
Analysts are calling for Qualcomm to have a record year in 2021, with 30%+ revenue growth. That seems totally reasonable to me, given that 2021 will be the year when most consumers upgrade their smartphones to 5G devices. It’ll be an upgrade cycle like we’ve never seen before.
Thereafter, residual upgrades coupled with further expansion of 5G into other parts of the technology sector will sustain healthy 5%+ revenue growth at Qualcomm.
Profit margins will improve with scale, higher demand and stronger pricing, meaning that profit growth should outpace revenue growth over the next five years.
Assuming so, my modeling suggests that Qualcomm has visibility to $11 in earnings per share by fiscal 2025.
Bottom Line on QCOM Stock
Thanks to settlements with both Apple and Huawei, Qualcomm’s growth trajectory is now ready to seamlessly roar higher over the next several years on the back of 5G tailwinds.
Alongside that big growth, QCOM stock will keep powering higher.
So, stick with the rally.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.