Qualcomm (QCOM 0.49%) and Nokia (NOK 0.65%) are very different companies, but they'll both profit from the long-term growth of the 5G market, which could expand at a compound annual growth rate (CAGR) of over 30% through 2026, according to Research and Markets.
Qualcomm is one of the world's largest mobile chipmakers. Its Snapdragon system on chips (SoCs) bundle together CPUs, GPUs, and 5G baseband modems for smartphones and other devices. Its massive portfolio of wireless patents also grants it a cut of each smartphone sold worldwide.
Nokia is one of the world's largest suppliers of telecommunications equipment. Nokia-branded phones still exist, but the Finnish company no longer produces them -- it merely licenses its brand to HMD Global, a separate company that designs, manufactures, markets, and sells the devices.
Qualcomm and Nokia were both resilient investments in 2021. Qualcomm's stock rose about 20% as it benefited from the surging demand for new 5G chips, while Nokia's stock rallied roughly 60% as a new CEO stabilized its wobbly business. Which of these 5G plays will generate bigger returns in 2022?
A tale of two turnarounds
Qualcomm and Nokia both struggled in their respective markets before executing their recent turnarounds.
In 2018 and 2019, Qualcomm struggled with sluggish smartphone sales, antitrust probes and fines across the world, smartphone makers revolting against its licensing fees, and its failed attempt to buy NXP to become world's largest automotive chipmaker.
But by the start of 2020, Qualcomm had resolved most of its regulatory challenges and signed new terms with the defiant smartphone makers. New orders for 5G chips rolled in, and its $30 billion buyback plan -- which was launched after the NXP deal collapsed -- boosted its earnings per share (EPS).
As a result, Qualcomm's business stabilized even as the pandemic disrupted supply chains worldwide. In fiscal 2020, its adjusted revenue rose 12% to $21.7 billion -- with its chipmaking and licensing revenues growing 13% and 10%, respectively -- and its adjusted EPS improved 18%.
In fiscal 2021, Qualcomm's adjusted revenue soared 55% to $33.5 billion as it chipmaking and licensing revenues rose 64% and 26%, respectively, and its adjusted earnings soared 104%. New 5G devices, which finally prompted many consumers to upgrade their devices, sparked that growth.
Nokia's problems started after it acquired its rival Alcatel-Lucent in 2016. Instead of investing in new 5G technologies, Nokia spent too much time trying to cut costs while integrating Alcatel-Lucent's massive business. The escalating trade war also caused Nokia to lose lucrative contracts in China to its Chinese rivals Huawei and ZTE.
Nokia suspended its dividend in 2019 to free up more cash for its 5G expansion, but it had already fallen behind its Swedish rival Ericsson (ERIC 1.87%) in that race. Instead of launching a bold turnaround plan to close that gap, Nokia's CEO Rajeev Suri abruptly resigned in early 2020 and handed the reins over to Pekka Lundmark.
Nokia's revenue declined 6% to 21.9 billion euros ($24.7 billion) in 2020 as its Chinese revenue plummeted and it lost 5G contracts to Ericsson and other competitors. However, its adjusted EPS still improved 18% as it exercised tighter cost controls throughout the pandemic.
But in the first nine months of 2021, Nokia's revenue rose 3% year over year to 15.8 billion euros ($17.9 billion) as its adjusted EPS grew 118%. It attributed that growth to the stabilization of its 5G business, which has secured 207 commercial 5G deals to date and runs 72 live 5G operator networks, and improvements to its cloud and networks business. Analysts expect its revenue and adjusted EPS to grow 3% and 38%, respectively, this year.
What do the valuations and dividends tell us?
Qualcomm and Nokia are both expected to generate slower growth in 2022 as the initial round of 5G upgrades cools off.
Analysts expect Qualcomm's revenue and earnings to grow 18% and 25%, respectively, this year -- but those are still impressive growth rates for a stock that trades at just 17 times forward earnings.
Analysts expect Nokia's revenue and earnings to both increase by about 3% next year. Those growth rates seem tepid, but they indicate its business is gradually stabilizing and it won't be crushed by Ericsson or Huawei anytime soon. Its stock also looks fairly cheap at 15 times forward earnings.
Qualcomm also pays a decent forward dividend yield of 1.5%. Nokia still hasn't reinstated its dividend yet.
The better 5G pick for 2022: Qualcomm
Nokia outperformed Qualcomm over the past year, but that's mainly because the stock had plummeted to a multi-year low in early 2020.
If we directly compare these two companies, Qualcomm is still clearly a better 5G stock than Nokia, for four reasons: Its core business is healthier, it's growing at a much faster rate but only trades at a slightly higher valuation, it doesn't face as many direct competitors, and it still pays a decent dividend.