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Why Investors Should Keep Their Eyes on Qualcomm Stock

By Will Healy - Apr 17, 2020 at 7:13AM

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The potential of 5G will likely override any China-related threats.

Although Qualcomm (QCOM -3.30%) stock has suffered amid antitrust issues, coronavirus may bring another challenge to light. While its products facilitate activity in a world locked down, the company's deep exposure to China poses a threat that could linger long after the virus ceases to act as a threat.

However, the advent of 5G also presents an unprecedented opportunity for investors. As the dominant producer of 5G chipsets, the need for Qualcomm's technology could send the stock much higher in the coming years. Moreover, the stock's current levels also offer investors an opportunity to buy a high-growth income stream and a generous dividend payout at a reasonable price. In the coming years, these advantages could make Qualcomm stock a buy despite any China-related challenges.

The financial case for Qualcomm stock

Qualcomm stock has staged a dramatic recovery since reaching a recent low of $58 per share in mid-March. After making a steady comeback, it has recovered to about the $77 per share level. Still, even with that recovery, Qualcomm stock remains well below the January high of $96.17 per share.

QCOM Chart

QCOM data by YCharts

However, despite this recent move higher, the stock remains a bargain. As things stand now, the forward P/E is about 17.4. Nonetheless, analysts forecast an average earnings growth rate of 25.11% per year for the next five years. That takes the price-to-earnings-to-growth (PEG) ratio well below one, a sign of an inexpensive stock.

Moreover, this tech stock has become an underappreciated dividend play. In 2020, the company is on track to pay its investors $2.48 per share this year. That amounts to a yield of around 3.4%. This comes in well ahead of the S&P 500 average yield of about 2.1%.

The company has also hiked the dividend steadily since 2010, when the company first introduced the payout. Dividend levels remained steady since 2018. Still, with a payout ratio of about 62.7%, a majority of net income already goes to this payout. The suspension of increases keeps the payout ratio in check while still offering stockholders a generous yield.

The China factor

One explanation of why the P/E ratio remains relatively low may hinge on China. The country accounted for $11.61 billion of the company's $24.27 billion in revenue in 2019. Revenue from China fell significantly from the $15.15 billion brought in from that country in 2018. However, China remains the company's largest market and produced more than four times the $2.77 billion in revenue from the U.S. in the same year.

Robot arm with vacuum working on a smartphone chip.

Image source: Getty Images.

Nonetheless, due to the coronavirus crisis, the company's supply chain faces challenges. CFO Akash Palkhiwala did not hesitate to point this problem out in the February conference call. The company factored these issues into its forward guidance.

Moreover, China's handling of the coronavirus crisis has caused tension within the international community. Given Qualcomm's ties to China, any action to boycott China or even shift manufacturing away from the People's Republic could dramatically hurt Qualcomm's revenue. It may also lead to widespread disruptions if the company finds itself in the middle of a geopolitical dispute.

Why investors should consider investing anyway

However, despite these China-related issues, Qualcomm stock may not be as compromised by such a situation as many would assume. The company has managed to maintain its dominance of the smartphone chipset market. This will prove valuable as more tech users adopt 5G. This power was confirmed when Apple settled its lawsuits with the company, and Qualcomm's dominance was further strengthened by the fact that Intel sold its modem business to Apple. Even the government felt compelled to permit Qualcomm to produce chipsets despite the Federal Trade Commission winning a judgment against the company.

Given this industry influence, investors should expect massive growth. According to Allied Market Research, the chipset market is expected to grow from $2.12 billion in 2020 to $22.93 billion by 2026. Hence, even in the unlikely event of China's complete exclusion, this industry is going to see massive growth over the next few years. Although Qualcomm operates under a cloud, the need for 5G chipsets should ensure the company's continued growth for years to come.

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Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$123.53 (-3.30%) $-4.21
Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
Intel Corporation Stock Quote
Intel Corporation
INTC
$36.34 (-2.86%) $-1.07

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