Both Micron Technology (MU 5.69%) and Qualcomm (QCOM 4.32%) operate in the semiconductor industry. But that might be the end of the similarities between these two companies. The former generates its revenue from manufacturing both DRAM and NAND memory products, while the latter manufactures and licenses the technology that connects devices to cellular networks.
Determining which stock to buy is a crucial exercise for all investors. Building your own portfolio requires making good picks, and pitting two companies against each other (like Micron and Qualcomm) can help hone that skill. So which is the better buy today?
The good and the bad for Micron
The bad news is that Micron's main source of revenue (memory products) goes through times of dramatic highs and lows, and right now is a down time. This cycle is completely outside of Micron's control, and there's no way to know just how long and severe an industry downturn will be. That's less predictability than some investors are comfortable with.
The good news is that in its first-quarter fiscal 2020 earnings report, Micron's CEO expressed optimism that next quarter will be the bottom of the cycle. This bottom isn't as harsh as in previous cycles, because the company maintained profitability throughout and is expected to be cash-flow neutral next quarter -- a stark difference from the $1.3 billion in negative cash flow from 2016.
The industry is on the cusp of many growth drivers, such as 5G cellular networks, the Internet of Things, autonomous driving, and artificial intelligence. These will boost the entire industry, not just Micron. As we'll see, Qualcomm looks to gain from 5G's rollout more than Micron. But there's one underappreciated industry trend that I believe sustained Micron through this down cycle, and looks to continue driving revenue growth.
In cloud computing, computing power is essentially outsourced to a data center -- a physical place housing real equipment. As consumers and enterprises increasingly migrate toward cloud computing, companies that provide these services (like Amazon.com and Microsoft) are forced to buy more memory products to handle the workload.
While so much of Micron's business has been slow, management noted that Q1 demand from cloud-related products was up, and is expected to stay strong going into next quarter.
The good, the bad, and the ugly for Qualcomm
Like Micron, Qualcomm's revenue is affected by things outside of its control, like the timing of new products launched by technology companies. Full-year revenue actually peaked way back in fiscal 2014 (which ended Sept. 18, 2014) at over $26 billion. That's about 9% higher than fiscal 2019 revenue of over $24 billion. However, 2019's revenue is slanted because it includes a one-time payment of $4.7 billion from Apple to settle a multiyear royalty dispute.
Falling revenue is largely due to problems with Qualcomm's licensing business. It's significant because this is its most profitable business segment by far. For example, in 2014 when revenue peaked, licensing only accounted for 30% of Qualcomm's revenue, but 63% of its earnings before taxes. This is still largely the case, with fiscal 2019 results showing that licensing accounted for 54% of earnings before taxes despite generating 19% of the revenue (excluding Apple's settlement).
Falling licensing revenue is bad enough, but it gets uglier. The Federal Trade Commission ruled in May that Qualcomm must change its business model. To date, the company has required a licensing agreement for any company using its chips. The FTC said this is anti-competitive and can't continue. There's currently a delay in enforcing this ruling as higher courts review the case. But this could drastically affect Qualcomm's business.
The good news for Qualcomm investors is that 5G cellular networks should be a huge boost, since its Snapdragon chips are still the most widely used mobile chip. As 5G rolls out, Qualcomm's device revenue should pick up, even if it ultimately loses much of its more-lucrative licensing revenue. Furthermore, if you like share repurchases and dividends, Qualcomm deserves your consideration. In fiscal 2018 and 2019, the company returned over $30 billion to shareholders, reducing its outstanding shares over 22% during that time.
The better buy
While there are definitely growth drivers for Qualcomm, the uncertainty with its licensing revenue is enough to keep me on the sidelines for now. Micron, by contrast, isn't facing a threat that could completely disrupt its business model. Micron's stock may already be up close to 100% from late-2018 lows, but it still has plenty of room to run as industry trends pick up.