Shares of chip giant Qualcomm
have increased 138% to a record high of around $ 145 since they bottomed this March.
After reporting big gains on November 4th, I see three reasons this stock needs to keep rising:
- 5G smartphone production more than doubled
- License related legal issues in the rearview mirror
- Strong support from bullish Wall Street analysts
(I have no financial interest in the securities mentioned in this post).
Qualcomm beats and raises
San Diego-based Qualcomm went public in December 1991, and its shares have since posted an average annual return of 21.1% – despite years (2014 to 2019) in the doldrums. That’s still much better than the S&P 500’s average annual rate of increase of 7.9%.
Qualcomm’s stock has risen sharply since the March 18, 2020 low. The impressive results of the fourth fiscal quarter brought an upswing.
Qualcomm reported a 73% increase in revenue to $ 6.5 billion – 10% above consensus estimate and adjusted earnings per share of $ 1.45 – 24% more than Wall Street expected, according to CNBC.
Qualcomm also led analysts to expect 26.1% revenue growth in the $ 7.8-8.6 billion range for the first fiscal quarter ending December, according to CNBC – well above the consensus of $ 7.1 billion – and adjusted earnings per share between $ 1.95 and $ 2.15.
5G smartphone production more than doubled
5G enables wireless internet connections that are much faster – once it’s in place. According to TheStreet.com, Apple’s iPhone 5G could enable wireless internet connections that are 100 times faster than older phones.
Qualcomm could be a big beneficiary of the demand for Apple’s iPhone 5G. According to the Wall Street Journal, Qualcomm expects 5G smartphone shipments in 2021 to more than double the expected total by 2020.
This could benefit Qualcomm as one of its 5G modem chips is included in Apple’s first 5G smartphone, the iPhone 12. Qualcomm expects to ship 200 million 5G smartphones in 2020, and expects a 150% increase to 500 million to be shipped in 2021 for the Diary.
License related legal issues in the rearview mirror
Apple and Qualcomm fought fierce intellectual property litigation for years. Qualcomm also struggled with disputes with Huawei and the Federal Trade Commission (FTC).
These legal issues are mainly behind Qualcomm today. After Apple’s 2019 dispute was settled this quarter, Qualcomm’s results included revenue from the sale of its chips – including the “more expensive millimeter-wave 5G format” [for the iPhone 12] following years of [being] Exclusion when the two companies were fighting in court, ”according to the Wall Street Journal.
Qualcomm also settled a lawsuit with Huawei in early 2020 that “removes the last major impact on the licensing business,” the Journal said.
The chipmaker also won another lawsuit against the FTC that wanted to reconsider its decision to dismiss the government’s antitrust lawsuit against Qualcomm. After a federal appeals court rejected the FTC, its “only long-term option [is to] Take the matter to the Supreme Court, ”the Journal wrote.
Strong support from bullish Wall Street analysts
Three Wall Street analysts are optimistic about Qualcomm:
- Bank of America wrote that Qualcomms “align stars” due to the multi-year 5G cycle, taking full advantage of the license fees of all major smartphone and other device manufacturers, higher chip prices and the company’s “technology leadership” according to CNBC.
- Canaccord Genuity – which has raised its target price to $ 175 – agrees with much of Bank of America’s analysis and expects “strong gains through F2022 and beyond,” according to CNBC.
- Deutsche Bank’s Ross Seymore argued that Qualcomm “is the ‘best way’ ‘to play the expansion set that will take place in the 5G handset space next year,” wrote CNBC.
A note of caution. Analysts’ optimism could be a mixed blessing. After all, Wall Street rewards companies for exceeding expectations for the current quarter and increasing their forecasts for the future.
If all of this good news for Qualcomm means that expectations are so high the company can’t follow suit, investors who step in now may be disappointed. Given the long-term tailwind that is driving demand for Qualcomm products, this is a risk well worth taking.
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