Qualcomm (QCOM -1.15%) has both prospered and suffered because of its position in the smartphone market. The stock has experienced massive growth and stagnation as market dominance attracted both market and legal challenges from competitors and antitrust authorities.
Nonetheless, Qualcomm has again become a force in the market and sells for just below its all-time high of almost $189 per share. Three factors have helped the semiconductor stock return to a growth trajectory. Let's take a closer look at them.
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1. 5G Strength
As conditions stand now, manufacturers cannot build a 5G phone without a critical smartphone chipset from Qualcomm. Despite this seemingly dominant position, this has concerned investors.
In 2019, Apple (AAPL -0.32%), which had long litigated against Qualcomm regarding its wireless patents, bought Intel's smartphone modem business. It made this move presumably to develop its own chipset, freezing Qualcomm out.
However, while Apple accounts for close to 50% of smartphone sales in the U.S., according to Counterpoint, its global market share comes in closer to 15%. Qualcomm stock rose last month when it cited this fact, showing that it can prosper with or without the iPhone producer.
The company has also deflected a threat from Nvidia (NVDA 1.48%). Nvidia has attempted to buy Softbank's Arm Holdings, a company from which Qualcomm licenses some chip designs. Qualcomm opposed this takeover on fears that Nvidia might gain control of the licensing of this critical component. Fortunately for Qualcomm shareholders, antitrust bodies seem intent on blocking this merger, removing a significant threat.
Moreover, Grand View Research forecasts a compound annual growth rate of 69% through 2028 for the smartphone chipset industry. This growth rate gives Qualcomm considerable potential for success even with these threats.
2. Diversification away from smartphone modems
In addition to 5G, Qualcomm has also begun to diversify away from its core business, and it looks increasingly like an under-the-radar metaverse stock. Overall, Qualcomm derived about 38% of its revenue outside its core handset market in 2021.
With the advent of self-driving cars, Qualcomm has begun to leverage its technology for automotive applications. This technology can connect cars to the cloud, other vehicles, mobility services, and other applications. Additionally, with its recent acquisition of Veoneer, the company can now integrate Veoneer's Advanced Driver Assistance Solution (ADAS), enhancing Qualcomm's software capabilities in this sector. The automotive sector accounted for just under $1 billion in revenue for Qualcomm in fiscal 2021.
Also, its second-largest segment is now IoT. With IoT, it leverages its technology to offer smart platforms designed to reduce both costs and development times. Its solutions work for home, commercial, healthcare, and other applications. In fiscal 2021, IoT accounted for about $5 billion of the company's $27 billion total revenue.
Furthermore, Qualcomm's recent takeover of Nuvia, which specializes in CPU and technology design, can enhance these technologies. It can also boost its radio frequency (RF) front-end business. This division, which consists of chips designed to receive radio signals, accounted for an additional $4.2 billion in revenue in 2021.
3. Qualcomm's valuation
Despite such successes, investors may not yet fully appreciate Qualcomm's potential. Admittedly, Qualcomm has risen by more than 50% since October. However, much of that increase merely made up for Qualcomm's falling stock price for most of 2021. Year to date, Qualcomm stock has risen by around 20%, slightly underperforming the S&P 500's total return.
QCOM data by YCharts
Still, Qualcomm stock sells for a P/E ratio of 23. This appears cheap considering that non-GAAP revenue increased by 55% in 2021. Moreover, the two companies that have recently threatened its market dominance, Apple and Nvidia, sell for 31 times and 94 times earnings, respectively, making Qualcomm appear all the more inexpensive.
The state of Qualcomm
Amid some genuine challenges, Qualcomm remains poised for prosperity despite a near-record stock price. Staying ahead of its competition will remain an ongoing battle for Qualcomm. Nonetheless, the growth rate of the 5G industry, its increasing product diversification, and a reasonable valuation bode well for the company and its stockholders.
