Madhu Chaudhary breaks down Qualcomm's dominance in 5G chips and patent licensing. The addressable market is expanding from $65 billion in 2019 to $100 billion by 2022, driven by 5G smartphone adoption. At 22x forward P/E, the analyst sees the valuation as attractive and rates it a buy.
Hello everyone and welcome to Forced Focus from LeftBrain Investment Research. I'm Madhu Chaudhary, investment analyst here at LeftBrain. I'm here to give you my recent insights on Qualcomm and conclude my report with thoughts on whether the stock makes for a good investment. Here at LeftBrain Investment Research, we evaluate securities through the LeftBrain lens, a process beginning with market intelligence from our proprietary technology system, Jarvis, followed by an analyst deep dive into criteria uncovering critical insights that drive a successful business. So let's dive in by reviewing Qualcomm's business model. Most smartphones in the world use Qualcomm's technology in one way or the other. The company has two segments: QCT, which stands for Qualcomm CDMA Technologies and includes the sale of chips and software pertaining to 3G, 4G, and 5G, as well as other technologies for use in Internet of Things or IoTs. QTL or Qualcomm Technology Licensing includes royalties that the company receives by licensing its intellectual property to companies such as Apple. So what makes Qualcomm special? The company has a monopolistic position in the smartphone market globally. In fact, it alone accounts for nearly half of the 5G baseband market It follows a controversial practice called "no license, no chips." As per this model, the company's competitors are allowed to sell chips that are manufactured using Qualcomm's patented technology only to phone manufacturers who have licensed the patents from Qualcomm, thereby forcing phone manufacturers to buy a license from Qualcomm even if they do not buy chips from it. This essentially means that Qualcomm gets a portion of revenue generated from most mainstream smartphones such as Apple's iPhone. Let's review the company's growth opportunity. Qualcomm has a large addressable market that is expected to see strong growth. As per the company's 2019 Analyst Day presentation, the company's addressable market is expected to reach $100 billion in 2022 from $65 billion in 2019, primarily driven by 5G. In fact, Qualcomm is at the cusp of strong growth cycle as a result of the advent of 5G, and we're already starting to see impact on its financials. The company recently posted record revenue growth after several quarters of lackluster performance. Shipment of 5G smartphones globally are expected to ramp up in a major way in 2021 and beyond, and Qualcomm is a direct beneficiary of this multi-year tailwind. Now that we have reviewed the company's growth opportunity, let's have a look at the company's leadership. Recently, the company saw leadership transition as its longtime CEO Steve Mollenkopf announced retirement and is expected to formally hand over the reins at the end of June 2021 to Cristiano Amon, who joined Qualcomm in 1995 and is currently the president of the company. While Mollenkopf is a seasoned old hand at Qualcomm, Amon is a Qualcomm veteran as well who knows the company inside out and will maintain a sense of continuity in the organization. The last critical piece of this puzzle is a stock's valuation. Given the premium valuation in tech at the moment, we find Qualcomm's 22x forward price-to-earnings ratio as particularly appealing. So what does all this mean for Qualcomm stock? Qualcomm's monopolistic position in the smartphone market coupled with accelerating growth in the wake of 5G is a powerful combination, and we expect the company to outperform over the next few years. With the long term in mind, LBIR feels the company is well positioned, and we are giving Qualcomm a green light rating. For more investment insights with a view through the left brain lens, visit us at leftbrainir.com to like, share, and subscribe. Be a part of a growing community of left brainers who experience the informed decisions and independent thought that powers our search for profitable investment opportunities. This is Madhu Chaudhary for First Focus from Left Brain Investment Research. Thanks for watching, and I'll see you soon with more investment insights.
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