Qualcomm Inc (NASDAQ:QCOM), a company specializing in wireless communications technology, benefitted as a direct result of the outbreak of the COVID-19 pandemic since it caused an increase in the demand for items related to mobile communication. As a result of increased sales, the company’s shares had increased by 163% by the end of 2020 in comparison to the early pandemic low it had reached in March. The QCOM stock then ran into a wall of worry early in 2021, as investors grew afraid that it may lose income from its major client as early as 2023. This caused the stock to face a wall of anxiety.
One of the reasons why Qualcomm (QCOM stock) is no longer concerned about losing that significant customer is as follows:
Apple is the company with the most customers.
Since the two businesses concluded a patent battle in 2019, which was in Qualcomm’s favor, Qualcomm has been in jeopardy of losing income from Apple. Apple’s reaction to this defeat was to acquire the majority of the smartphone modem business owned by Intel. This was a clear indication that Apple wanted to begin producing these components on its own. The market, on the other hand, assessed Qualcomm’s danger of losing Apple in the near future as being only a small worry in 2019 and 2020; this is the reason why the stock of Qualcomm was not significantly affected by this risk. In addition, it is possible that it will take Apple a significant amount of time to create a high-end 5G modem. One of the factors that contributed to Intel’s decision to sell its modem business to Apple was the company’s struggle to bring its 5G modem up to industry standards.
However, by the year 2021, the market has developed a new perspective on that danger, and there are two reasons for this.
To begin, Apple started making investments in a brand new facility in Munich, Germany, in March 2021. This facility is going to be focused on wireless technology. Nikkei Asia stated later in the year that Apple will employ Taiwan Semiconductor to develop its first 5G modems by the year 2023.
Second, a major Wall Street analyst estimated that Apple is responsible for approximately 20% of Qualcomm’s sales, which caused some investors to be concerned that the company would be losing its ability to generate profits in the near future.
The stock price of Qualcomm remained flat for the better part of 2021 due to concerns about the general economy as well as the possibility that Apple might stop using Qualcomm as a supplier.
There are no longer any concerns over the possibility of losing Apple’s business.
However, by the end of the year 2021, the mood of investors towards Qualcomm had switched from unfavorable to favorable.
As of August 2022, the market research organization Statista reported that Android controlled close to 70 percent of the share of the worldwide mobile operating system industry, while iOS only accounted for 28 percent of the market. Therefore, even if Apple were to stop doing business with Qualcomm, the company would still be able to maintain its position as the market leader for modems by continuing to produce that component for Android smartphones. In addition, Qualcomm manufactures a variety of other mobile components in addition to modems. For instance, it is also the market leader in creating processing chips for premium and high-tier Android handsets, and it has held this position for quite some time.
In addition to this, 5G opens the door to new use cases that go beyond mobile phones. In addition, the firm is in the process of transitioning from being a communications provider for the mobile phone sector to becoming more of an Internet of Things (IoT) and edge-computing hardware company at the present time.
The firm’s management now expects that the business is on pace to earn up to $9 billion in sales from IoT by the end of its fiscal year 2024. This figure is larger than the $6.1 billion in revenues that the company made from mobile phones in its most recently reported quarter.
In addition, there are allegations that Apple is still having trouble creating its 5G modem chip and will continue to rely on Qualcomm as the sole modem provider for the iPhone in 2023. If accurate, Apple’s continued reliance on Qualcomm would be explained. This will provide it with more time to diversify its revenue streams away from Apple. It is therefore doubtful that the loss of the company’s most important client will constitute a blow of such magnitude to the business, despite the fact that it will continue to be painful when it inevitably occurs.
A fantastic opportunity in the long run.
Although shareholders of Qualcomm do not need to be concerned (for the time being) about the company’s relationship with Apple, the business is facing a number of other short-term headwinds that are expected to abate sometime in the year 2019. Gartner, a consulting group, has projected that demand for mobile devices, which has been on a downward trend, could begin to pick up in 2023 as a result of a secular trend in which people are replacing their outdated 4G smartphones with 5G smartphones.
The present concerns over the state of the macroeconomy, which are driving the market as a whole, have resulted in a reduction in the valuation of Qualcomm’s stock to an attractive level. According to Zacks, an investment research firm, the current price of the stock is equivalent to a price/earnings-to-growth ratio (PEG) of 0.64. To put it in perspective, the average PEG ratio for the cellular equipment market is 1.82. In addition, equities that have PEG ratios that are lower than one are typically considered to be cheap.
Today can be a great time to buy some Qualcomm shares if you have a moderate appetite for risk in your investment portfolio, are confident in the positive long-term trends that are expected to favor Qualcomm in the future, and are willing to take advantage of this opportunity.
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