Dial Up Qualcomm on Its Rare 5G Setback
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Dial Up Qualcomm on Its Rare 5G Setback

Fifth-generation wireless is getting an undeserved bad rap as wireless carriers overpromise blazing speed and ubiquity.

On Tuesday, managers at QUALCOMM Inc. (Nasdaq: QCOM) rolled out the x65 modem. The tech was quickly billed as the gateway to the 10 GB mobile internet.

Investors should look past the hype to focus on network density … and the likelihood that Qualcomm is going to sell a lot more chips.

That’s because 5G has never really been about blazing fast mobile internet. Carriers simply sold it as such to ramp up lagging smartphone sales. Like most technology, our beloved iPhones and Pixels got good enough years ago and we stopped upgrading every year.

Weaker handset sales followed. Carriers had a more difficult time locking in customers … so they built the myth that 5G changed everything.

In practice, it isn’t much different than 4G right now. Download speeds were faster, but not that much quicker. The improvement has been network stability. It’s a bandwidth thing.

If we think about mobile networks as highways of traffic, 5G adds lanes, lots of lanes. Those new lanes can move more data faster. Older 4G networks were congested and traffic-based pileups became commonplace.

There is no shortage of new applications itching for a world with more mobile bandwidth. Smarter factories with more automated processes, connected cars and neighborhoods are top of mind.

Company managers explained that most of these applications will come to life through a software process called chaining. Basically, Qualcomm has found a way to chain together different radio frequencies to build wider paths between 5G access points. The result is stronger, more stable networks.

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And because software is integral to the way these new networks function, carriers don’t have to worry about futureproofing hardware. The x65 can be brought up to snuff with a simple over-the-air software upgrade.

This flexibility is opening doors for Qualcomm across many new sectors, like automotive.

On Jan. 9, Qualcomm was a featured partner at Nio Ltd. (NYSE: NIO) Day. The Chinese carmaker revealed its ET7 sedan that features always-on network connectivity for high bandwidth/low latency 5G, Bluetooth 5.0, WiFi 6 and the full vehicle-to-everything user experience.

Connecting cars to the network and everything else is going to be a big part of the future of the industry. As vehicles transition from internal combustion engines to electric, several automakers have decided to take the Tesla, Inc. (Nasdaq: TSLA) approach. This requires always-on connections and lots of new gear from technology companies like Qualcomm.

Ironically, the automotive sector is responsible for the recent Qualcomm share price collapse, too. The stock fell 8.4% Feb. 4 after managers said chip shortages at several automakers is hampering manufacturing capacity across the entire processor ecosystem. The San Diego-based company can’t make chips fast enough to satisfy customers. But too much demand isn’t terrible in the long run.

Unfortunately, Qualcomm executives have a long history of poor messaging. In the same way they allowed wireless companies to mess up the narrative around 5G, they’re letting analysts advance the idea their business is stagnating. This is far from true.

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The recent 10-Q filing showed sales to handset makers like Apple, Inc. (Nasdaq: AAPL) surged to $4.2 billion, up 79% from a year ago. Radio frequency chipsets used by wireless providers jumped 157% to $1 billion. And the processors automakers need to make their vehicle internet ready rose 44% to $212 million despite an industry-wide manufacturing slowdown. This should have been a terrific story.

And it still can be because it’s an opportunity for longer-term investors.

Despite demand surging to levels Qualcomm hasn’t been able to completely meet, growth has been impressive. Once the company fixes its aforementioned problems, I expect we’ll see growth improve again.

Qualcomm shares trade at only 17.2 times forward earnings and 6.3 times sales. Given the fact that the business has no major competition at the high end for 5G chips and modems, these metrics are a steal.


 

Savvy investors should buy shares in this weakness.

Best wishes,

Jon D. Markman

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