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Qualcomm- An "Enormous Advantage" in 5G

5G is the fifth generation of wireless cellular technology. But it is much more than just another incremental advancement. It represents a technological tipping point that crosses a threshold into the digital age where everything is computerized, explains Tom Hutchinson, editor of Cabot Dividend Investor.

It will offer speeds and internet connectivity on a scale far beyond what is available now. The current 4G technology supports about 4000 devices per square kilometer.

5G will support about a million with instantaneous interaction with the internet. Today, only a few things are connected to the internet. In a few years, the whole world will be computerized.

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It will enable self-driving cars, real time artificial intelligence and virtual reality, smart homes and cities and it will reshape the way we receive healthcare, shop and use the military.

You may think we are already in the digital age. But, in a few years, you’ll realize that the digital age has truly begun. 5G is such a game changer that many companies and governments can’t afford to be left behind.

Qualcomm (QCOM) has an enormous advantage going for it right now. It is the undisputed king of the chips that will enable 5G technology.

Its 5G Snapdragon 855 chipset uniquely offers modularity, the ability to mitigate existing spectrum to accommodate 5G. It offers a bridge between older 3G and 4G and the 5G upgrade that virtually every company will need.

In order to effectively compete in the fierce race between countries and companies to develop the new technology, equipment makers must have Qualcomm’s chips.

Qualcomm is still, in my view, reasonably valued. It currently sells at 25 times earnings, which is only slightly higher than the five year average. Year-over-year earnings have fallen for the last couple of quarters largely because companies have pulled back on 4G products as they ramp up for 5G.

But the main reason to buy QCOM is acceleration in earnings next year as 5G rolls out. Analysts forecast a 45% spike in earnings next year and an average gain of 27% over the next five years. But those estimates could be quite modest.

Although the stock is up 60% so far this year, there are a couple of issues that have held it back. It had a legal dispute with Apple (AAPL) over Qualcomm’s licensing practices that was resolved.

Apple is back to using its chips. However, there are other suits pending in the U.S. and abroad over Qualcomm’s practice of charging a percentage on the whole phone sale. It is likely that future rulings will somewhat diminish the profitability of Qualcomm’s licensing fees going forward.

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Then there’s the China trade war. Bad news about trade disputes with China has hurt the technology sector and semiconductors in particular. It’s a problem because Qualcomm derives roughly two thirds of its revenue from China. There is a ban in doing business with device maker Huawai which is one of Qualcomm’s customers. Any negative headline about the trade situation usually hurts QCOM stock.

That said, Qualcomm offers the state-of-the-art 5G chip and other technology that China will need to compete. China needs Qualcomm more than vice versa. Even without a trade resolution Qualcomm will likely continue to sell to China. As well, a trade deal would probably be a huge positive for the stock.

Sure, the lawsuits will likely continue. And the market will continue to be uneasy about the trade situation. But QCOM is standing on the precipice of a massive growth in demand for its products as businesses expand into 5G. And the change to 5G is occurring at a much faster rate than the one for 4G, according to QCOM. The changeover will begin in haste next year in 2020 and will continue for several years.

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