San Diego-based Qualcomm (QCOM -2.36%) is the world's largest maker of mobile chipsets and wireless modems. The company's stock has performed very well over the past 12 months, running up more than 70%.
Investors are wondering if the party can continue for Qualcomm through 2020. The company's earnings release on Feb. 5 indicated more growth is on the way as 5G devices are rolled out.
Qualcomm earned an adjusted $0.99 per share on sales of $5.08 billion for the first quarter of its fiscal 2020, which ended Dec. 29. Analysts had expected earnings of $0.85 per share, and Qualcomm delivered a 16.5% upside surprise. On a year-over-year basis, the company's earnings fell 17.5% while sales rose 5%. After seven straight quarters of decline, Qualcomm returned to sales growth in fiscal Q1.
"Our strong fiscal-first-quarter financial performance reflects a significant inflection point for Qualcomm as we begin to realize the benefits from the ramp of 5G," said CEO Steve Mollenkopf in a press release.
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Opportunity is rooted in 5G networks
As mobile networks evolve to 5G, new chipsets are required. Qualcomm is in a prime position to benefit.
In April 2019, Intel announced it was leaving the 5G mobile-phone chip market. Qualcomm assumed leadership of the segment, striking important deals with industry leaders such as Apple, whose 5G phones coming out later in 2020 will all run on Qualcomm modems.
Qualcomm is continuing to innovate. On Feb. 18, it introduced its new X60 modem chips, the first to aggregate signals across frequencies in both types of 5G networks. This means telecoms will be able to send data over multiple wireless spectrum bands simultaneously for faster speeds.
Here's what can 5G do for average consumers, and why it's such a big deal: Retailers could use augmented reality to allow people to see themselves in outfits, or doctors could track biometric results from patient testing instantaneously and provide more efficient care. The technology will enable governments to collect more data and respond immediately to emergencies, such as extreme weather events.
Qualcomm owns much of the 5G intellectual property that will power these advances. It not only creates chipsets and modems, but also profits from licensing intellectual property to others.
A new product is introduced in driving technology
Qualcomm is also jumping into the autonomous-driving segment in a big way, challenging rivals Intel and NVIDIA, already four-year veterans of the market in autonomous-driving systems. At this year's Consumer Electronics Show, Qualcomm introduced Snapdragon Ride, a platform meant to support advanced driver assistance (ADA) programs and, eventually, fully autonomous systems.
General Motors worked with Qualcomm on development of the technology, and is using Snapdragon Ride for ADA systems that will be in production by 2023.
Before Snapdragon Ride, Qualcomm's automotive segment had focused on connecting onboard systems and developing a standard for communications between cars and hubs. Management sees broad opportunity in automotive by leveraging existing relationships. Mollenkopf commented: "Over 125 million vehicles use our broad range of automotive solutions including telematics, in-car connectivity and infotainment platforms. Our Snapdragon Ride ADA platform represents a significant expansion of our addressable market."
Should you buy Qualcomm stock now?
Qualcomm has faced challenges including limits on business with Huawei, an antitrust investigation in Europe, and ongoing supply-chain disruptions due to the coronavirus outbreak in China.
The company's price-to-earnings ratio of 25 compares favorably to the industry average around 31, and its market leadership in the shift to next-generation 5G networks is undeniable. Although no one knows how long the shift to 5G will take, Qualcomm's dividend, which currently yields 2.8%, pays you to wait. Reinvesting the dividends is a smart way to compound returns.
Qualcomm is well-positioned for a bright future, and I think it's a buy. Fears and market disruptions will always exist. But looking farther ahead, Qualcomm's products will underpin 5G technology, rewarding investors handsomely.
