Qualcomm Stock Prediction

Originally posted on https://financhill.com/blog/investing/qualcomm-stock-prediction

If you want to invest in consumer technology, you have a couple of different choices.

You could put your money in the companies that make the marquis smartphones and tablets that people use every day, or you could buy stock in the companies that make the components used in those devices.

Qualcomm [NASDAQ: QCOM] is one possibility.

Qualcomm [NASDAQ: QCOM] makes what it calls “foundational technologies” – those products used in mobile devices, networking equipment, and other consumer products.

“Our inventions helped power the growth in smartphones, which have connected billions of people,” wrote the company in its 2018 annual report. “We are a pioneer in 3G (third generation) and 4G (fourth generation) wireless technologies and are now a leader in 5G (fifth generation) wireless technologies to empower a new era of intelligent, connected devices.”

Qualcomm continues by explaining, “We derive revenues principally from sales of integrated circuit products and licensing our intellectual property, including patents, software and other rights.” Some of Qualcomm’s biggest clients include Samsung, Xiaomi, and companies who sell components to Apple.

The company divides its offerings into three segments.

The first is Qualcomm CDMA Technologies or QCT. It is all about semi-conductors. This sector develops circuits and the software that leverages their capabilities and comprises some 76% of the company’s business.

From there, its second segment, Qualcomm Technology Licensing (QTL) licenses out those pieces of intellectual property.

QTL also sells the right for companies to use some of Qualcomm’s patented technologies. Most of these involves wireless technologies. It makes up 23% of Qualcomm’s business.

The last segment, Qualcomm Strategic Initiatives (QSI), oversees the company’s strategic investments and comprises less than 1% of Qualcomm’s business.

Qualcomm [NASDAQ: QCOM] also has some non-reportable segments. These cover its efforts in cyber security, healthcare, and other initiatives.

Qualcomm [NASDAQ: QCOM] is part of an industry that has grown rapidly for over two decades. In 1994, there were less than 60 million connections around the world. By the end of 2018, the number of global connections stretched to almost 9 billion – and they are still growing.

Connectivity is extending and growing worldwide. The demand for smartphones in particular is growing. Roughly 1.5 billion smartphones shipped in 2017.

By 2022, that figure is forecasted to reach 7.8 billion.

“Consumer demand for new types of experiences empowered by 3G/4G LTE connectivity, combined with the needs of mobile operators and device manufacturers to provide differentiated features and services, is driving continued innovation within the smartphone,” explains Qualcomm.

“It is expected that 5G connectivity will drive further innovations within the smartphone and increase consumer demand by offering enhanced connectivity, which in turn will enable new applications.”

Qualcomm’s products have been a major provider of the foundational technologies upon which the mobile industry is built, so growth in the industry parlays into growth for this company, or at least it can.

Qualcomm is positioning itself to take advantage of this surge by acquiring certain technologies, including NXP Technologies and RF360 Holdings.

The latter is part of a joint venture with a company called TDK Corporation. Together, this venture will focus on using radio frequency filters and front-end modules to enable applications under the Internet of Things (IoT).

The company is also working to cut costs.

In fiscal 2Q18, Qualcomm announced that it would implement a cost savings plan to better meet its long-term margin goals. It is attempting to cut $1 billion from its annual costs.

That may sound ambitious, but Qualcomm [QCOM] expects to meet that mark by the end of fiscal 2019.

There are certain risks associated with Qualcomm.

Perhaps most notably, the company’s ability to generate sales depends on its ability to compete effectively in communications technologies.

It needs to stay relevant and current in order to attract the customers and licensees it need to grow its revenues. If a new technology provider emerged with a superior offering, Qualcomm could be left holding the short end of the stick.

Also, the company gets a disproportionate amount of its income from a handful of OEMs in China. Losing one of these customers for any reason would be devastating to the company.

Qualcomm also faces a risk with regard to the products its customers choose.

Take Apple [NASDAQ: AAPL] for example.

The company uses Qualcomm’s Mobile Data Modem (MDM) products. These offerings generate smaller amount of revenue than its other combined modem and processor product offerings.

To make matters worse, Apple attracts would-be customers to those devices over others to which Qualcomm provides higher-margin products.

Effectively, Qualcomm ends up competing against itself. It can be a slippery slope.

Qualcomm has other issues of note too.

Its CFO, George Davis, stepped down in April 2019 so he could take up the same role at Intel [NASDAQ: INTC].

The emerging 5G technologies are another matter.

Qualcomm is positioning itself as a “one-stop shop” for 5G smartphone components and it has a fair number of partner devices that will be hitting the market in 2019, but it is a gamble.

Huawei and Samsung, amongst others, are also moving aggressively in the 5G space.

In the beginning of 2019, it looked as though Qualcomm’s former CEO Paul Jacobs would buy the company and take it private – but he abandoned those efforts suddenly.

Jacobs’ only comment was that he decided to focus his efforts on a wireless tech company called XCOM.

One possible issue is that Qualcomm is facing legal issues regarding the way it licenses its patents. Qualcomm had been the company behind Apple’s network connectivity chips for roughly five years. Then, in 2017, Apple decided to sue.

“Because Qualcomm owns patents related to 3G, 4G and 5G phones — as well as other features like software — any handset makers building a device that connects to the networks has to pay it a licensing fee, even if they don’t use Qualcomm’s chips.

That includes Apple,” explains CNet. “Apple thinks it should pay a royalty fee based only on the value of Qualcomm’s connectivity chips, not the entire device.”

The issue is complicated, and the legal battle is ongoing.

If you are considering investing in Qualcomm, take the time to do your research first and pay close attention to what happens with Apple.

There are many reasons to be bullish about what could come next for Qualcomm, but the dust has not settled. It would be wise to be cautious.