Qualcomm Nears 5G Inflection Point

With only a few weeks to go until their Q1 earnings are released, Qualcomm NASDAQ: QCOM is the front foot and gaining momentum in all the right places. Shares went into the long weekend with a 5% rally on Friday that put them at fresh all-time highs which means they’re now up a clean 20% since the start of December.

Friday’s latest push came on the back of an upgrade from Citi NYSE: C, who noted that the “long-awaited 5G ramp” is starting to come into play and that Qualcomm is one of the best prepared semiconductor stocks out there to take advantage of it due to their partnership with Apple NASDAQ: AAPL. Indeed, as recently as last month, Qualcomm’s president, Cristiano Amon, said that launching Apple’s first 5G phone, with their modems, ‘as fast as we can’ is the top priority.

The faster they can get this 5G phone on the shelves the better for both companies’ top-line numbers, in particular, Qualcomm. While they’ve beaten analyst estimates 100% of the time over the past two years and revenue 75% of the time, the latter still contracted by 18% year on year in November’s Q4 release. This was still better than the consensus expected but Wall Street will surely be expecting more from a $100 billion tech company whose shares are up over 90% since this time last year.

Potential Headwinds

Perhaps the fact that shares are performing so well is due to the potential and promise that analysts and investors see in the 5G market. That’s not to say there aren’t naysayers out there. Bernstein, in particular, is a little warier than most and wasn’t afraid to point out that November’s earnings release would have been a miss if management hadn’t cut forward guidance the previous quarter. They’re also skeptical about how much of the 5G opportunity is already baked into the share price and how much more room there is for that to develop without sizeable growth in the opportunity or real tangible results.

Other headwinds do exist with the 5G play and investors should be mindful of them if they’re getting involved. There are concerns in some corners that Apple could create its own in-house chips to compete with those of Qualcomm which would at best-put pricing pressure on them. However in their note on Friday, Citi noted that the 5G cycle is likely to put these concerns on hold for at least another year.

This should give some peace of mind to investors who are still nervous about the two tech giants becoming hard-line competitors again rather than the tentative partners they’ve been since last April. At the time they both agreed to drop all litigation between them and to enter a multi-year licensing agreement. But that didn’t stop Apple purchasing Intel’s NASDAQ: INTC smartphone modem business for $1 billion in July. There’s talk that with them now having an in-house modem development business, Apple could be self-sufficient when it comes to 5G modems within 3 years which puts huge pressure on Qualcomm’s ability to stay relevant. This is the trouble with companies who nail their colors to the mast as being major suppliers to bigger name end producers.

While other big smartphone names like Huawei, Sony, and Samsung also use Qualcomm’s chips, this means any slowdown in overall smartphone growth puts Qualcomm’s earnings at risk. As we noted last November, “the US embargo on Huawei imports has hurt sales and has definitely been a thorn in investors’ sides. Qualcomm is a company that grows with its customers so anytime they sneeze Qualcomm is at risk of catching a cold.”

Future is Still Bright

All that being said though, this is still a best in class semiconductor company that has positioned itself as the leading supplier of chips and modems for the smartphones of today and those of tomorrow as well. The 50-day moving average has been a solid source of support to any pullbacks in recent months and investors could look to time an entry around there. Alternatively, for those with less patience, this is also a stock heading into blue sky territory with a serious spring in its step. There’s nothing like the promise of massive growth to grab Wall Street’s attention and that’s exactly the situation Qualcomm’s shares find themselves in today.