Qualcomm (QCOM) and Apple (AAPL) have been fighting lawsuits relating to patent pricing since 2017, and there are countless headlines of both companies in the news talking about the unfolding of events, but strategically speaking, it seems Qualcomm has maneuvered itself quite efficiently to preserve its technology patent licensing model, but primarily because they’re still the industry leaders in the mobile connectivity segment of the market.
Apple’s alliance with Intel sounded great, but when looking at Qualcomm’s launch of its 5G Capable modems this year, and the diminishing prospects of Intel keeping up with Qualcomm in the mobile connectivity space, things could only take a turn for the worst if Apple continues with lawsuits in various countries with Qualcomm.
Usually, at this point companies would try to settle, because they’re integral players in a supply chain. Instead, things haven’t resolved quite as quickly, which has caused the stock price of Qualcomm to perform somewhat poorly in the past couple years.
Apple has shifted its orders away from Qualcomm to penalize them, and for the most part it seemed to be working with Intel supplying components.
However, this time around Apple with its impending release of the iPhone this upcoming September is rumored to not have 5G capability quite yet. This means a pushback or a delay, which relies primarily on Intel’s modem development timing for 5G, which was rumored to come out in December of 2019. This implies that there could be an iPhone release that features 5G in 2020 with Intel’s Modem, but if not, it would be further delayed until 2021.
Given Apple’s high-end pricing experts are also questioning whether Apple will make such a risky move and delay the transition to 5G based on Intel’s roadmap. If anything, they could always turn course on the Qualcomm lawsuit and continue with paying royalties and settle any outstanding dispute, but that scenario itself is very nuanced and difficult to anticipate, other than the fact that eventually a settlement might occur.
What this spells though is an interesting value investment opportunity in Qualcomm, which has managed to stay way further ahead of its rival in networking, i.e. Intel. This paired with the fact that it trades in a $50 to $70 range over the past couple years with the stock at $56 currently makes it somewhat attractive. The business model could return to growth on heightened excitement for 5G, which could drive smartphone sales growth, as consumers look to upgrade their phones for better bandwidth.
So, the mobile market could see shipment growth on a major technology upgrade cycle, and the expansiveness of the mobile cloud or the number of mobile capable devices could increase with more bandwidth available, which could expand the market opportunity for modems in other web connected devices (this hasn’t yet played out, but if it does, it means more chip sales). More web connectivity, or more devices that communicate with other devices could become a major growth driver over a longer time frame, so the business might not necessarily have peaked in terms of its total growth
Qualcomm pays a 4.36% dividend yield, and it doesn’t seem like there’s much risk to Qualcomm’s licensing model or chip manufacturing and delivery model anytime soon. Apple hasn’t declared a whole lot of victories on the legal front, and the company continues to lead in mobile networking, and will continue to earn stable enough revenue to keep growing its payouts and cashflow at a reasonable amount each year. It’s not an insane growth story, but very rarely do tech companies offer 4%+ dividend yields and trade at a reasonable growth multiple as well. The business narrative could start turning around upon the deployment of 5G and diminishing concerns in the courtroom with Apple long-term.
Hence, it’s a bit contrarian, but Qualcomm is cheap relative to its 52-week high, and they pay investors a sizeable yield (that’s also sustainable). The growth narrative likely improves from here, so investors should pay closer attention to Qualcomm because it’s paying investors to keep them around and the business could be poised for growth on 5G deployment from FY2020.
Disclosure: Alex Cho has no position in QCOM.
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