3 reasons why Qualcomm Stock is a buy

Investors continue to look for ways to profit from the launch of fifth-generation (5G) networking services. But when it comes to benefiting from this upgrade, they may want to establish a strong connection with Qualcomm (QCOM -0.31% ).

The essential role of the semiconductor company in the 5G market is expected to significantly increase Qualcomm’s stock in the coming years. Here are three reasons.

1. The demand for 5G smartphone chipsets

AT&T, Verizonand T-Mobile have spent in recent years and tens of billions of dollars to develop a national 5G network.

Image source: Getty Images.

With the faster speeds and lower latency of 5G, engineers expect it could easily be 10 times or more faster than previous 4G technology.

Samsung started selling 5G phones last year. However, after the recent release of Apple iPhone 12, the 5G upgrade cycle has reached a new plateau.

Therefore, almost all smartphone users will probably want to switch to this technology at some point. Grand View Research forecasts the smartphone chipset market to grow at a compound annual growth rate of 63%. Therefore, some expect 2021 to become a definition year for the company.

2. Qualcomm’s position in the smartphone chipset market

For now, smartphone makers only have one company they can choose from to get a necessary 5G chipset: Qualcomm.

Despite this situation, the government and Qualcomm’s competitors have not called Qualcomm a monopoly in the legal sense.

Ultimately, Apple settled its lawsuit and Qualcomm persuaded the courts to overturn a previous monopoly decision. Indeed, customers and even regulators want 5G chips more strongly than they want to reduce Qualcomm’s market power.

Yet, although Apple settled the matter in court, it also bought Intelthe smartphone chipset business of . It could one day give Qualcomm a competitor. However, unless that day comes and until that day comes, all the benefits of 5G chipset growth will accrue to Qualcomm.

3. Rating does not reflect opportunity

Qualcomm’s latest non-GAAP quarterly revenue rose 35% from year-ago levels. Diluted earnings per share increased by 86% over the same period.

It’s probably not a unique number. Qualcomm also released guidance for the first quarter of 2021. During this period, Qualcomm estimates that diluted EPS will reach $1.95 to $2.15 per share. Considering that Qualcomm achieved a diluted EPS of $0.99 in the first quarter of 2020, this would translate to an approximate doubling of earnings.

This level of growth is not reflected in Qualcomm’s current stock price. Despite stock price growth of nearly 70% over the past 12 months, Qualcomm shares trade at a forward price-to-earnings (P/E) ratio of around 21.

Such a multiple generally reflects lower levels of earnings growth than investors have experienced recently with Qualcomm. Therefore, the relatively low valuation looks like a huge opportunity for investors.

QCOM Chart

COMQ given by Y-Charts

Qualcomm is a buy

Not only is Qualcomm a buy, but it’s also hard to imagine a better position for potential buyers. Regardless of what happens with the overall economy, the world will almost certainly embrace the faster speeds of 5G.

Since only Qualcomm manufactures a mission-critical 5G chipset, all benefits from the projected 63% CAGR will likely go to this. stock of chips. Qualcomm’s massive earnings growth reflects this.

What doesn’t reflect opportunity is the forward P/E ratio, which now sits barely above 20. Given market and financial conditions, tech stock investors should grab this opportunity before Qualcomm’s valuation and share price rise much higher.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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