Qualcomm Poised to Reap Rewards from 5G in 2020

Qualcomm QCOM reported solid fiscal fourth-quarter results with revenue in line with guidance. Despite the array of factors impacting results (5G transition, U.S.-China tensions, Huawei licensing dispute, Apple agreement, and regulatory scrutiny), we think the firm remains a prominent player in 5G. We anticipate continued licensing sales from 5G devices and growth in content in 5G devices to bolster chip revenue, or QCT. Management expects the first calendar quarter in 2020 to represent an inflection point in 5G revenue, and we project QCT to be up in the double-digits in fiscal 2020. We are raising our fair value estimate to $80 per share from $72, thanks to our improved outlook for Qualcomm in 5G. Nonetheless, shares of narrow-moat Qualcomm look expensive in our view, as shares are up about 50% year-to-date.

Fourth-quarter sales came in at $4.8 billion. QCT sales were down 22% year over year at $3.6 billion due to the 4G to 5G pivot (particularly in China) and Huawei export ban (which also led to Huawei shifting their emphasis to building domestic China market share with products that provide Qualcomm with neither product nor licensing sales). Licensing, or QTL, revenue came in at $1.16 billion, which was up 4% year over year thanks to current period Apple royalties partially offset by an absence of royalties from Huawei. Concerning the latter, Qualcomm continues to negotiate with Huawei on a license agreement. With the current export ban, we do not expect the dispute to be resolved anytime soon. Thus, management excluded royalties from Huawei in its forward guidance. Non-GAAP operating margins were 22%, which was relatively flat from the prior quarter.

Fiscal 2019 sales were $24.3 billion, or $19.4 billion not including the one-time settlement payment from Apple. The latter implies a revenue decline of 14% mostly due to weakness in China and the 5G transition. Management expects first-quarter sales to be at a midpoint of $4.8 billion.

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