Qualcomm Stock is not as cheap as it will be

<p>The financial year 2020 is referred to as the year for 5G technology. Among companies, Qualcomm (NASDAQ: QCOM) is probably one of the biggest recipients of the impending 5G revolution. The Qualcomm stock started FY2020 on a high and even touched $ 96.20. But the rally has not been maintained and the Qualcomm share is trading at $ 83.1, which is 13.6% lower compared to the recent peaks.

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Even with the correction, I would recommend investors to avoid new exposure to Qualcomm shares. Of course, 5G will be a game changer. Not just 2020 but in the coming decade. That said, growth may be slower than expected during the first launch years. Qualcomm potentially discounts this factor.

In the foreseeable future, coronavirus from China is likely to affect 5G growth. With the outbreak spreading outside China, the first half of 2020 could potentially be weak for 5G-related companies.

As an example, China Mobile has postponed base station installations. Beijing Mobile also believes that 5G construction plans in FY2020 “will definitely be affected.”

Even in India, it is speculated that the government will have difficulty auctioning off the “expensive” 5G spectrum before the beginning of 2021. Economic headwinds due to the coronavirus would affect the auction process and delay the implementation of 5G.

When we return to Qualcomm, the company has already lowered its earnings guidance for the second quarter of 2020. The company believes that there is “uncertainty about the coronavirus‘ impact on demand and the supply chain.”

This can keep the Qualcomm stock depressed. I would also not be surprised if there are further downgrades of the performance guidance.

Infrastructure issues will affect 5G growth

The uncertainty associated with the coronavirus is likely to affect growth in the coming quarters. However, I believe that 5G rollout may be slower than expected with infrastructure issues as the main challenge.

Cliff Kane, CEO of Cleareon Fiber, a network services specialist, believes the launch of 5G “will have no profound impact this year or next.” The years in question are FY2019 and FY2020.

Similarly, reports suggest that 5G deployment is slower than expected in the United States. Again, one of the most important challenges is infrastructure issues. Telecom companies want more clarity about potential profitability before investing in new 5G infrastructure.

It is also worth noting that 5G signals travel a short distance and therefore 5G requires a much denser network. This will make penetration in metropolitan and rural areas a major challenge.

Therefore, my view is that even without the coronavirus factor, 5G growth would have been slower than expected.

The long-term growth prospects

My focus has been on challenges for the 5G expansion in 2020 and possibly 2021. However, I have no doubt that 5G technology will continue to grow in the coming years.

To put things in perspective, 5G is expected to enable $ 13.2 trillion in global economic output by 2035. It is worth noting that the adoption of 5G is not just limited to mobile phones. Qualcomm believes that the future of cloud and AI will be strongly adapted to 5G.

Therefore, 5G will see breakthroughs in a wide range of industries including car, agriculture, tools and manufacturing. As an example, tools can take advantage of the “MIoT and MCS features of 5G for smart metering and smart grid automation.”

Similarly, in the automotive industry, 5G can accelerate the adoption of autonomous cars. These self-driving machines are expected to generate huge amounts of data. It is 5G that can speed up the transmission of this data.

Concluding thoughts on the Qualcomm share

Qualcomm is one of the early movers in the 5G revolution and the company will benefit from the next few years. The integration of 5G with technologies such as cloud, AI and IoT will translate into strong growth for Qualcomm.

However, the Qualcomm share has slipped relatively sharply in the short term and the reason is potential headwinds in 2020. With broad markets remaining uneven, it makes sense to avoid new exposure to Qualcomm shares.

In the coming weeks, there will be further clarity on the extent of a slowdown in the global economy due to the coronavirus outbreak. There will also be clarity about disruptions in the supply chain and its impact on the 5G growth potential for 2020.

These factors can keep the Qualcomm stock volatile with a downward bias. I therefore recommend a “wait and see” method.

Faisal Humayun is a senior research analyst with 12 years of industry experience in credit research, equity research and financial modeling. Faisal has authored over 1,500 share-specific articles focusing on the technology, energy and raw materials sectors. At the time of writing, he had no position in any of the above-mentioned securities.

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