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Antitrust, China Uncertainty Are Priced Into Qualcomm Stock

Will Healy

Qualcomm (NASDAQ:QCOM) stock investors received some welcome news late Tuesday. The United States Department of Justice has asked the government to hold off on enforcing the recent antitrust ruling. In its argument, the DOJ called the ruling a threat to “competition, innovation and national security.” This sent QCOM shares higher in Wednesday trading.

This offers welief to QCOM stock investors. Just when the dispute with Apple (NASDAQ:AAPL) appeared resolved, the Federal Trade Commission won a ruling against the company. Now, the government has ruled that Qualcomm is a monopoly, and the decision would change the way it does business and alter licensing agreements. But with the DOJ siding with Qualcomm, the company has a better chance at maintaining its market standing.

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However, the company faces more challenges than antitrust issues. Due to Qualcomm’s presence in China, the company finds itself in the middle of the trade dispute. Whatever happens with U.S.-China trade could have profound effects on QCOM stock. However, with a relatively low valuation and future growth driven by the adoption of 5G, Wall Street has likely priced the antitrust and trade-related challenges into the price of QCOM.

Qualcomm Stock Offers Compelling Financials

From a valuation and growth standpoint, Qualcomm seems like a slam dunk. For this year, analysts only expect an earnings increase of 2.7%. However, with the advent of 5G, they expect profits to grow by 34.8% next year. They predict an average growth rate of 27.05% per year for the next five years. Investors can currently buy this growth for about 15.4 times forward earnings.

Also, amid stagnation, the dividend continues to serve investors in QCOM stock well. This year’s payout stands at $2.48 per share, a yield of almost 3.3%. Moreover, this payout has increased every year since QCOM began paying a dividend in 2010.

Financials Not the Driving Force of QCOM Stock

Unfortunately for QCOM stock investors, forces other than financial metrics largely influence the stock. Instead, QCOM has traded on these lawsuits surrounding its highly coveted chipsets. These chips have become all the more critical as the world begins to adopt 5G wireless.

Many regard this technological edge as a monopoly. It reminds me of how the dominance of Windows bolstered Microsoft (NASDAQ:MSFT) in the 1990s. That likely also explains why Apple decided to settle their years-long legal dispute with the company. Now, the appeals court will have to decide whether the FTC can force Qualcomm to renegotiate contracts regarding the licensing of its chipsets. With the DOJ standing on Qualcomm’s side, QCOM’s chances to prevail have probably increased. Still, the outcome remains uncertain.


Geopolitics Also Influences QCOM

Investors must also contend with another factor rarely seen outside of the oil and gas industry — geopolitics. China made up approximately two-thirds of Qualcomm’s revenue in 2018. South Korea accounted for about 14%, while only about 2.7% of the company’s revenue came from its home market in the U.S. As InvestorPlace contributor Vince Martin pointed out, the company has paid fines levied by antitrust authorities in both China and South Korea.

Geopolitics also touches on an interesting point brought up by InvestorPlace contributor Josh Enomoto. Mr. Enomoto points out the national security implications involved with Qualcomm. With the Chinese government backing Huawei, QCOM could find itself in trouble without similar backing from the U.S. government. Since the Department of Defense (DOD) met with the FTC during the case, it will likely go to bat for QCOM. While nobody knows the outcome of this dispute, the DOD backing should ease the minds of investors hesitant about QCOM stock.

The Bottom Line

Still, the price of Qualcomm stock likely reflects both the antitrust and geopolitical challenges. As mentioned before, QCOM stock trades at over 15 times forward earnings. With the DOJ now firmly on its side, Qualcomm’s valuation has increased. However, if these concerns did not affect QCOM at all, I think the stock would trade at a much higher price-to-earnings ratio.

Furthermore, the trade dispute will inevitably end at some point. Both the U.S. and Chinese economies depend heavily on one another. Hence, I do not see the disagreement destroying Qualcomm’s revenue stream in China. Additionally, with 27%+ profit growth projected every year for the foreseeable future, adoption of 5G looks set to propel QCOM higher regardless of the trade dispute.

Prospective buyers should get in and collect a generous, growing dividend. The growth will come as 5G expands and as antitrust and trade regulators resolve the various disputes.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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