Amid all the focus on COVID-19 and its effects on the broader markets, stocks like Qualcomm (QCOM 4.39%) seem like an afterthought. It appears that few investors want to focus on 5G at the moment. Nokia announced that the coronavirus pandemic might delay 5G rollouts. Also, much of the talk about 5G in the world of COVID-19 appears to emphasize 5G-related infection rate conspiracy theories rather than investments.
However, the lockdowns to reduce the spread of the coronavirus have fostered a greater dependence on technology to accomplish tasks and stay connected. With online communication becoming an increasingly important part of our daily lives, both Qualcomm and its 5G chipsets will likely become more critical in the near future.
COVID-19 and 5G
Due to the coronavirus, millions of workers have had to shift work to their homes. Work and social meetings that took place in person just a few months ago suddenly became dependent on offsite logins and conference sessions on Zoom Video Communications and comparable platforms.
Even after the pandemic, much of this activity will remain online. This is all the more reason the world will depend on the 5G chipsets made by Qualcomm.
However, with the virus restricting companies to essential activities only, 5G providers delayed buildout. For this reason, Qualcomm did not become a 5G stock the way Zoom did.
Qualcomm admitted as much when management acknowledged that demand for handsets fell by 21% in the most recent quarter. The company also expects a 30% reduction in shipments for the current three-month period.
Still, the turmoil began at the end of the quarter, and the company remained resilient. Despite COVID-19, revenue increased by 7% in the most recent quarter. Non-GAAP earnings also rose by 14% to $0.88 per share.
Nonetheless, it was not enough to completely shield Qualcomm. The company's stock fell in late February and early March. While it has recovered from those mid-March lows, it has not bounced back at the rate of other semiconductor stocks like Nvidia or AMD. Qualcomm stock trades at a discount of about 11.8% from its January high.
At current levels, Qualcomm trades at a forward P/E ratio of around 22.2. This comes in much higher than the average forward multiple for the last five years of about 14.7.
Admittedly, this year's expected earnings increase of 5.6% may not impress prospective stockholders. However, investors should also remember that last year, the company resolved the lawsuit with Apple that had held this stock down for years. Moreover, analysts expect profit growth to take off once 5G becomes more widely adopted. They predict that earnings will increase 55.9% next year and average almost 25.7% per year for the next five years.
Moreover, even if COVID-19 delays 5G adoption for a time, investors can still earn a return. Qualcomm's annual dividend of $2.60 per share yields about 3.3%. The company has also hiked this payout periodically since it began paying dividends in 2003. The most recent increase came in early March as fear of COVID-19 began to reach a fever pitch.
Why Qualcomm's Potential is Delayed But Not Denied
The company's cash flows have tremendous potential to grow in the coming years. For now, Qualcomm dominates the 5G chipset market. So powerful is this dominance that, despite the Federal Trade Commission winning an anticompetitive business practices lawsuit against Qualcomm in the spring of 2019, it has won an enforcement delay against the judgment while an appeals court reviews the ruling against it.
Moreover, China-based Unisoc plans to launch a competing 5G chip. Additionally, Apple bought Intel's mobile chip unit last year, likely in hopes of doing the same.
Still, the 5G chipset market will see a compound annual growth rate of 87.8% from 2020 to 2025, according to Research and Markets. Hence, regardless of the competitive situation of the company, Qualcomm should benefit.
To be sure, COVID-19 has slowed both 5G deployment and adoption, which has affected the company's financials. However, the pandemic has also accelerated the move into many online functions. As a result, even though few seem to want to focus on 5G now, demand will likely increase as remote functionality becomes increasingly necessary.
As individuals and businesses transition into 5G, Qualcomm stock should see its revenue and profits drastically increase over the next few years.