Corning (GLW 3.64%) and Qualcomm (QCOM 4.17%) are both key Apple (AAPL 2.45%) suppliers. Corning's chemically hardened Gorilla Glass protects Apple's iPhones and iPads, while Qualcomm's modems provide cellular connectivity for iPhones and iPads.
But the companies' businesses reach far beyond Apple's supply chain. In addition to providing Gorilla Glass to Apple and other mobile device makers, Corning also sells optical networking components, LCD displays, gas filters for automakers, and the chemically improved Valor Glass for drugmakers. Qualcomm is the world's top manufacturer of mobile SoCs (system on chips), and its massive portfolio of wireless patents entitles it to a cut of each smartphone sold worldwide.
Over the past five years, Corning shares rose 150%, while Qualcomm shares dipped 3%. Let's take a closer look at how the 167-year-old glass and ceramics maker outperformed Qualcomm, and whether or not that trend will continue.
A closer look at Corning
Corning's two largest businesses, its Optical Communications and Display Technologies units, generated over 60% of its revenues last quarter.
Its Optical revenues have consistently climbed over the past few quarters thanks to network and infrastructure upgrades at service providers and enterprise customers.
Corning recently acquired 3M's communications unit to increase the optical unit's scale, and expects the entire business -- which generated $3.7 billion in sales in 2017 -- to hit $5 billion in sales by 2020.
However, Corning's Display revenues have been consistently weak due to cyclically low demand for LCD screens. Corning expects annual price declines to decelerate this year, but the market still hasn't bottomed out yet.
The remainder of Corning's revenue comes from its higher-growth Specialty Materials (Gorilla Glass), Environmental Technologies (gas particulate filters), and Life Science (Valor Glass) units.
All three units have consistently grown over the past few quarters, with the Specialty Materials unit regularly posting double-digit sales growth on content gains in mobile devices. Corning is also producing new versions of Gorilla Glass for cars, wearables, and augmented reality devices to expand its total addressable market.
A closer look at Qualcomm
Qualcomm generates the majority of its revenue from mobile chip sales, but most of its profits come from its higher margin licensing business.
Qualcomm's chipmaking (QCT) business ceded market share to cheaper rivals like MediaTek and first party SoCs from major OEMs like Huawei over the past few years, but its Snapdragon SoCs remain the preferred chipset for most OEMs.
Qualcomm also continues to provide baseband modems to OEMs like Apple, which use their own application processors.
However, Qualcomm's licensing (QTL) business has been besieged over the past three years by regulators and OEMs, which all claim that its fees (up to 5% of the wholesale price of a smartphone) are too high. As a result, regulators in China, South Korea, Taiwan, and Europe fined Qualcomm billions of dollars, and it could face additional fines in the US.
Apple also sued Qualcomm over those fees, calling them "illegal", and ordered its suppliers to suspend all licensing payments to Qualcomm. Recent reports indicate that Apple could replace all Qualcomm modems with Intel ones in future iPhones, which would take a bite out of its QCT revenues.
Qualcomm is trying to fix these problems by buying NXP Semiconductors (NXPI 3.79%), the largest automotive chipmaker in the world. However, that deal remains in limbo due to shareholder resistance to Qualcomm's offer. To further complicate matters, Broadcom (AVGO 2.52%) is attempting a hostile takeover of Qualcomm.
Which company is growing faster?
Wall Street expects Corning's revenue to grow 4% this year, but for its earnings -- weighed down by pricing challenges in its Optical and LCD businesses -- to slip 1%. But after those headwinds fade, analysts expect its revenue and earnings to respectively rise 6% and 15% in fiscal 2019.
Analysts expect Qualcomm's revenue and earnings to respectively fall 4% and 22% this year, due to the aforementioned probes, fines, and lawsuits. Qualcomm thinks that if it closes the NXP deal, settles its conflict with Apple, and cuts costs by $1 billion, it can grow its sales by about 60% and more than double its non-GAAP EPS in fiscal 2019.
Yet I seriously doubt that Qualcomm can hit that target, since the NXP deal is uncertain, Apple doesn't look like it will back down anytime soon, and its regulatory fines keep piling up.
The valuations, dividends, and verdict
Corning trades at 15 times forward earnings, while Qualcomm has a forward P/E of 17. Both multiples are below their industry averages. Corning pays a forward dividend yield of 2%, which is lower than Qualcomm's forward yield of 3.5%.
Qualcomm might look like a better income play, but a higher dividend doesn't offset its regulatory headaches and clashes with OEMs. Therefore, I believe Corning -- which has a better diversified business, solid growth engines, and a decent dividend -- is a better investment at current prices.