San Diego-based Qualcomm (NASDAQ: QCOM ) has made the news in 2018 with its tit-for-tat legal battle with Apple (NASDAQ: AAPL ) over royalties as well as the rejection by the U.S. Justice Department of its attempt to acquire NXP Semiconductor (NASDAQ: NXPI ), the microchip designer. Coupled with the broader market decline, the legal uncertainty surrounding QCOM stock has weighed on its price since early October. However, investors may want to look beyond the headlines and consider the fundamental reasons that may drive QCOM shares to higher levels in the coming months.
Qualcomm is the largest chipmaker for smartphones and its chipsets account for about two thirds of total revenue. Its next main source of revenue comes from mobile phone royalties and licensing. If experience and past results act as a guide for the future, Qualcomm's success in earlier generation mobile networks of 3G and 4G will make them a long-term investor's pick, as analysts believe QCOM will play a dominant and early role in 5G, too. The 5th Generation Mobile Network will be rolled out commercially in the U.S. in 2019, first in increments, but later with increasing impact.
The benefits of 5G will include much faster download speeds, more data capacity - a must for the Internet of Things (IoT) devices, and lower latency or very little lag in mobile applications - which should have a positive impact on the development of online gaming as well as self-driving cars. The new technology will boost productivity and growth globally. 5G will also be at the center of the infrastructure for building smart cities .
While manufacturers are announcing that they will be releasing 5G smartphones soon, during its December 2018 Snapdragon Tech Summit , Qualcomm also demonstrated how its mobile chips will feature in these phones. Analysts are optimistic that the semiconductor side of 5G will help Qualcomm collect more royalties and increase its bottom line. They estimate a double-digit profit growth as well as a forward price-to-earnings ratio of about 12x, making QCOM stock a strong value play in the tech world.
QCOM Stock: The Healthy Dividend Yield Is Also a Big Draw
Income investors know that they can compound their returns through reinvesting dividends from high-yielding stocks. Qualcomm has a history of increasing dividends and its current dividend yield stands at about 4.4%. This is yet another critical reason why I believe Qualcomm stock belongs in a capital-growth portfolio. On Dec. 20, the company paid a quarterly common stock dividend of 62 cents per share; the next dividend announcement is expected in January 2019.
However, there are still a few things potential QCOM stock investors need to look out for. During 2018, QCOM's revenues have remained stagnant. If the organic earnings growth due to 5G does not begin to materialize in 2019, the market may penalize the shares further. Besides, if its legal battle with Apple drags on, investors may simply get tired of hearing about Qualcomm stealing the headlines for the wrong reasons. Then they might well decide to put their money to use in other tech stocks that seem to be getting cheaper by the day.
In case the Qualcomm stock price does suffer in 2019, I would not be surprised to see a takeover bid from a U.S. tech giant. Earlier in the year, President Trump blocked a hostile take-over by Broadcom Ltd (NASDAQ: AVGO ) on the grounds of national security. But QCOM's drive to become a leader in 5G means Wall Street would not be surprised to see yet another offer made - this time from a domestic company.
Bottom Line on Qualcomm Stock
Year-to-date, the Qualcomm stock price has fallen by 14%. The shares have ranged from a 52-week high of $76.50 (Sept. 18) to a Nov. 15 low of $53.50. For investors who pay attention to technical charts, there might be further weakness toward the high-$40's level - especially if tech stocks continue to be volatile well into the New Year.
Ultimately, investors should always base their decisions on individual risk/return profiles. Yet with the recent selloff, the price of QCOM stock has become more attractive as a long-term investment. On the 5G front, Qualcomm is likely to be one of the leaders, propelling earnings growth. Within two to three years, investors who buy QCOM stock are likely to be rewarded handsomely.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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