At first sight, Nokia (NYSE: NOK) may seem like an attractive 5G investment. The $ 4 stock price is more than 93% below its all-time high, and the company could make a comeback as a telecom equipment provider. However, such thinking can cause investors to miss the opportunity Qualcomm (NASDAQ: QCOM). Qualcomm’s stock has gained a lot of traction over the past year, and both market and financial factors indicate that 5G growth may have just begun.
Qualcomm’s market position
Qualcomm owns the most comprehensive portfolio of wireless patents in the world. Unlike Nokia, it has to compete with people like Ericsson and Juniper Networks, these patents place Qualcomm in a dominant market position. Thanks to its influence in the chipset market, smartphone users cannot access 5G without going through Qualcomm in some way.
Grand View Research predicts a compound annual growth rate (CAGR) of 63% for smartphone chipsets. As market conditions now stand, all that benefit accrues to Qualcomm.
The Federal Trade Commission (FTC) sued Qualcomm for this monopolistic power, as well as companies such as Apple (NASDAQ: AAPL). However, Qualcomm’s attorneys persuaded an appeals court to overturn the earlier “monopoly” ruling, and Apple eventually dropped its lawsuits against the wireless chip giant.
Nevertheless, Qualcomm will have to remain vigilant. After Apple dropped its lawsuits, it bought Intel‘s (NASDAQ: INTC) smartphone chipset unit, presumably to reduce or eliminate its reliance on Qualcomm chipsets. Also, NVIDIA has tried to acquire the British chip company Arm Holdings. Arm licenses low-power chip designs to Qualcomm. Since this would likely jeopardize Qualcomm’s market position, Qualcomm cannot afford to acquire NVIDIA Arm.
Qualcomm’s financial data
Yet these threats have done little to stop Qualcomm so far. For the first quarter of fiscal 2021, GAAP income increased 62% compared to the same period last year. As operating expenses increased by only 14% over this period, net income increased by 165%. Revenue shot up just 35% in fiscal 2020 and 73% from a year ago level in the fourth quarter, showing a significant improvement in 5G revenue growth after Apple released its 5G iPhone last fall.
Qualcomm’s growth brought it in at $ 2.7 billion in free cash flow in the previous quarter alone. This allowed the company to easily cover $ 141 million in interest payments. In addition, its total debt of $ 15.7 billion, while significant, does not threaten its balance sheet.
Cash flow also covered the quarterly dividend payment of $ 739 million, or $ 0.65 per share. That’s a total of $ 2.60 per year, for a cash return of about 1.9%. While not high, this payout is significantly higher than the S&P 500 an average dividend yield of approximately 1.4%.
Its success has also contributed to Qualcomm’s stock surging just below 90% in the past 12 months. This increase compares favorably with Nokia, which is up nearly 30% over the same period.
Despite this significant increase, Qualcomm’s P / E ratio comes in at around 23. This brings earnings close to last year’s low many-fold, when stocks fell amid a massive decline in technology stocks. In addition, potential competitor sells NVIDIA for about 90 times its profit, making Qualcomm a more attractive alternative. In fact, Qualcomm has a lower multiple than Nokia, which sells for about 26 times its revenue.
Market dominance and a low multiple make Qualcomm one of the more lucrative 5G stocks. Although Nokia sells for a low nominal price, its stock growth and market position do not compare well with Qualcomm’s.
Granted, if a peer can finally develop a competing chipset, it could cool the growth of Qualcomm shares. Nonetheless, the 5G upgrade cycle appears poised to continue. Even if NVIDIA, Apple, or some other company can gain some market share, the massive growth of the smartphone chipset market should keep Qualcomm going.
This article represents the view of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We are variegated! Questioning an investment thesis – even one of ours – helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.