Qualcomm (QCOM -1.36%) is in a power position among semiconductor stocks. The long-awaited widespread implementation of 5G networking has prompted a phone upgrade cycle and the company's popular 5G chipset will help it benefit. Moreover, Qualcomm stock still trades at attractive levels, and its move higher may just be the beginning.

However, Qualcomm faces challenges that could significantly set the stock back in the near term. If investors can deal with those risks, they face no other obvious obstacles that stand in the way of long-term gains in Qualcomm stock.

Qualcomm and the 5G chip market

In a business sense, investors may struggle to find a more uniquely positioned stock than Qualcomm. Due to the expected introduction of 5G-compatible devices by Apple (AAPL -1.04%), a new smartphone ecosystem will begin to adopt 5G as the new networking standard. Also, Apple's archrival in this space, Samsung, will probably launch a new lineup of 5G phones.

The good news for Qualcomm is that all new phones will require Qualcomm's 5G chipset. Furthermore, Grand View Research forecasts a compound annual growth rate (CAGR) of 63.4% through 2027.

5G chip on a board.

Image source: Getty Images.

So far, attempts to compete with Qualcomm have failed. The FTC was able to have Qualcomm ruled a monopoly, but the company persuaded an appeals court to overturn that ruling. Moreover, Intel (INTC 1.53%) tried to enter this market, but later sold its modem chipset business to Apple.

Apple had earlier attempted to win the battle in the courts. However, with the impending launch of 5G, it decided to settle its legal dispute. Though it presumably bought Intel's chipset business to compete with Qualcomm, it has not yet brought an alternative chipset to market.

Qualcomm's financials

The good news for new investors is that they can buy this growth stream relatively cheaply. For now, Qualcomm stock sells for a forward P/E ratio of just over 18. As for earnings, analysts foresee a little less than 11% growth this year.

Still, analysts forecast a year-over-year increase of over 23% in revenue for the upcoming quarter and a 67% rise in earnings. Both this and next year's predicted earnings increase of over 63% seem to back up Grand View Research's forecast.

Despite the low P/E ratio, indications are that investors have begun to see this opportunity. As Qualcomm dealt with the specter of Apple lawsuits, the stock did little. Since Apple settled last year, the stock broke out of that range. Moreover, since the March lows, it has almost doubled in value.

QCOM Chart

QCOM data by YCharts

Also, shareholders should remember that they may profit from this stock without selling shares. Except for 2019, the company's board has approved a payout increase every year since 2004. At its current annual rate of $2.60 per share, Qualcomm stock now yields just over 2.3%. Additionally, with over $1.45 billion in free cash flow in the most recent quarter, the company easily made the $733 million payment required to maintain the dividend.

Qualcomm's China problem

Despite this appealing value proposition, Qualcomm is not immune to long-term challenges. One point of concern with Qualcomm is geopolitical. The company has long depended on both China in general and Huawei in particular. Last month, the U.S. government imposed restrictions on sales of U.S.-made chips to the Chinese telecom giant.

Moreover, China has been Qualcomm's largest market for years. In 2019, the People's Republic accounted for nearly half of Qualcomm's overall revenue. In 2018, China made up about two-thirds of the company's revenue. If geopolitical pressure forced Qualcomm to unwind that completely, it would cause the stock a great deal of pain.

However, Intel just received licenses to supply specific products to Huawei. This helps Qualcomm since it eases some of the worst fears investors might have about business relationships with the Chinese tech company.

Qualcomm is a buy

Few tech stocks are better positioned to benefit investors than Qualcomm at the moment. The stock trades at a relatively low multiple, and the company dominates a niche expected to grow by more than 60% over the next few years.

Still, the company's dependence on China and its ties to Huawei present a danger. Additionally, the development of a competing chipset by Apple or another company could also curtail growth.

Nonetheless, as things stand now, Qualcomm is positioned to see massive benefits from a 5G upgrade cycle. This means the benefit to Qualcomm is probably not a question of if, but how much Qualcomm stock profits over the next few years.