The onset of the COVID-19 pandemic led to a surge in demand for mobile communication products, and wireless telecommunication technology specialist Qualcomm (QCOM -2.06%) benefited as a result. Rising sales pushed its stock up by 163% at the end of 2020 relative to the early pandemic low it touched in March. Then the stock hit a wall of worry in early 2021 as investors became concerned that it could lose revenues from its largest customer as soon as 2023.
Here is one reason why Qualcomm no longer fears losing that large customer.
The largest customer is Apple
Qualcomm has been in danger of losing Apple revenues since the two companies settled a patent dispute in favor of Qualcomm in 2019. Apple responded to that loss by purchasing most of Intel's smartphone modem business -- a sign that it intended to start making those components in-house. The market, however, viewed Qualcomm's near-term risk of losing Apple as only a minor concern in 2019 and 2020 -- a reason why Qualcomm's stock was impacted very little by this risk. Moreover, it could take Apple many years to develop a high-end 5G modem. Part of the reason Intel sold its modem unit to Apple was that it had been having difficulty getting its 5G modem up to par.
However, by 2021, the market was taking a different view of that risk, for two reasons.
First, in March 2021, Apple began investing in a new state-of-the-art facility focused on wireless technologies in Munich, Germany. And later in the year, Nikkei Asia reported that Apple would use Taiwan Semiconductor to produce its first 5G modems by 2023.
Second, one prominent Wall Street analyst estimated that Apple accounts for almost 20% of Qualcomm's revenues, sparking fears among some investors that a loss of its earnings power was in sight.
Between macroeconomic concerns and the threat that Apple might drop it as a supplier, Qualcomm's stock price stalled through much of 2021.
There are no longer fears of losing Apple's business
By the end of 2021, though, investor sentiment toward Qualcomm had shifted from sour to favorable.
Although its modem sales to Apple still provide a significant chunk of Qualcomm's top line, Android is the leading mobile platform. According to market data company Statista, as of August 2022, Android held close to 70% share of the worldwide mobile OS market, while iOS accounted for only 28%. So even without Apple's business, Qualcomm can remain a modem market leader by continuing to make that component for Android devices. Additionally, Qualcomm makes more mobile components than just modems. For instance, it is also the market leader in producing processor chips for premium and high-tier Android devices.
In addition, 5G enables new use cases beyond mobile phones. And currently, the company is transforming from a communications company for the mobile phone industry into more of an Internet of Things (IoT) and edge-computing hardware company.
Image source: Qualcomm.
Investors began recognizing the company's diversification into IoT and edge computing after it released its fourth quarter fiscal 2021 earnings in November of that year. Investors responded to the excellent results by sending the stock up 32% by year's end.
Today, management believes the company is on track to earn up to $9 billion in revenues from IoT by its fiscal year 2024 -- higher than the $6.1 billion in revenues from mobile handsets that it produced in its latest reported quarter.
In addition, there are rumors that Apple is still having problems producing its 5G modem chip and will continue to rely on Qualcomm as the sole modem supplier for its iPhone in 2023. That will give it additional time to diversify away from Apple. So while losing its biggest customer will still sting when it eventually happens, it's unlikely to be a devastating blow to the company.
A great long-term investment
Though Qualcomm investors need not worry (for now) about its relationship with Apple, the company is encountering other short-term headwinds that should dissipate sometime next year. Consulting company Gartner has forecast that flagging demand for mobile devices should pick up in 2023 due to the secular trend of users replacing their older 4G smartphones with 5G smartphones.
The current macroeconomic fears driving the broader market have pushed Qualcomm's stock valuation down to an appealing level. According to investment research company Zacks, it is trading at a price/earnings-to-growth (PEG) ratio of 0.64. By comparison, the wireless equipment industry's average PEG ratio is 1.82. And in general, stocks with PEG ratios below 1 are viewed as undervalued.
If you have some tolerance for risk in your portfolio and believe in the long-term trends that are poised to benefit Qualcomm, today might be an excellent opportunity to pick up a few shares.
