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June 20, 2020, 1:22 p.m. EDT

Trump kept these tech giants apart — now one’s a ‘buy’ and the other should be avoided

Charles Lemonides of ValueWorks makes the case for a 5G play

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By Philip van Doorn, MarketWatch


Getty Images, Bloomberg

(This is the second in a series of stories about technology stocks that investors may be overlooking. The <CROSSREF GUID="{8DD70990-AF10-11EA-BAAD-B30512BF9A3F}" DOCTYPEID="" FILE-NAME="" ENCODING-DATE="">first story</CROSSREF> focused on IBM and FAANG stock valuations.)

Qualcomm Inc. is being discounted by technology investors based on its “reasonable” valuation and growth prospects as 5G service and equipment is rolled out, said Charles Lemonides, CEO of ValueWorks in New York. The investor believes Broadcom, whose attempted hostile takeover bid for Qualcomm was nixed by President Trump in 2018, is a stock to be avoided.

Shares of Qualcomm /zigman2/quotes/206679220/composite QCOM -2.06% have returned 3.5% this year through June 17, compared with a 12% return for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.20%  information technology sector. (Total returns in this article include reinvested dividends.)

Qualcomm’s underperformance, in part, stems from a decline in demand for smartphone chipsets from Apple Inc. /zigman2/quotes/202934861/composite AAPL +1.77% as iPhone production in China was brought to a temporary halt. (Samsung Electronics Co. /zigman2/quotes/202367843/composite SSNLF 0.00%  is also among Qualcomm’s major customers.)

Qualcomm and Apple settled patent litigation in April 2019, with a six-year licensing agreement for Apple to use Qualcomm’s chipsets.

“The arrangement was predicated on products that were being developed. Those products have not made their way into iPhones yet,” Lemonides, who manages about $200 million for private clients, said during an interview.

There have been reports that Apple will delay its usual September launch of new iPhones (including expected 5G capability), but Apple hasn’t made an announcement.

It seems we have been hearing about the amazing world of 5G for years, but Lemonides believes we are at the cusp of a 10-year cycle of upgrades as the transformative technology is finally rolled out.

Analysts polled by FactSet expect Qualcomm’s sales for its fiscal 2020 ended Sept. 30 to total $20.8 billion, increasing 27% to $26.48 billion in fiscal 2021 and growing another 6% to $27.97 billion in fiscal 2022.

“That is real growth,” Lemonides said.

At the close June 16, Qualcomm’s shares traded at a much lower valuation to the consensus earnings estimate for the next 12 months than the FAANG stocks (plus Microsoft):

Company Ticker Forward price/ earnings ratio Total return - 2020 Estimated sales growth - next fiscal year Estimated sales growth - fiscal year +2
Qualcomm Inc. /zigman2/quotes/206679220/composite QCOM   19.4 3.5% 27% 6%
Facebook Inc. Class A /zigman2/quotes/205064656/composite FB   31.5 14.8% 24% 21%
Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN   115.9 42.9% 18% 16%
Apple Inc. /zigman2/quotes/202934861/composite AAPL   26.6 20.3% 13% 4%
Netflix Inc. /zigman2/quotes/202353025/composite NFLX   63.3 38.4% 18% 16%
Alphabet Inc. Class A /zigman2/quotes/202490156/composite GOOGL   32.8 8.4% 20% 15%
Alphabet Inc. Class C /zigman2/quotes/205453964/composite GOOG   32.7 8.5% 20% 15%
Microsoft Corp. /zigman2/quotes/207732364/composite MSFT   32.7 23.8% 10% 12%
Source: FactSet

Scroll the table to see all the data, including projected sales increases for the next two full fiscal years, based on analysts’ consensus estimates.

When asked about the risk that Apple may decide to move on from its relationship with Qualcomm after the companies’ current deal expires, Lemonides said: “Qualcomm has been able to stay at the cutting edge for 20 years and has been able to do so because they have the intellectual capital to build on. They have been the best in this space.”

He pointed to a long point of contention for investors who dislike Qualcomm’s stock. If we exclude dividends (the stock has a current dividend yield of 2.90%), the shares are only slightly higher than they were at the end of 1999:

/zigman2/quotes/206679220/composite
US : U.S.: Nasdaq
$ 113.41
-2.38 -2.06%
Volume: 9.96M
Aug. 13, 2020 4:00p
P/E Ratio
47.97
Dividend Yield
2.29%
Market Cap
$130.64 billion
Rev. per Employee
$607,486
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,373.43
-6.92 -0.20%
Volume: 1.96B
Aug. 13, 2020 5:10p
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 460.04
+8.00 +1.77%
Volume: 52.52M
Aug. 13, 2020 4:00p
P/E Ratio
34.96
Dividend Yield
0.71%
Market Cap
$1932.76 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/202367843/composite
US : U.S.: OTC
$ 44.20
0.00 0.00%
Volume: 1,250
Aug. 13, 2020 5:19p
P/E Ratio
16.69
Dividend Yield
N/A
Market Cap
N/A
Rev. per Employee
N/A
loading...
/zigman2/quotes/206679220/composite
US : U.S.: Nasdaq
$ 113.41
-2.38 -2.06%
Volume: 9.96M
Aug. 13, 2020 4:00p
P/E Ratio
47.97
Dividend Yield
2.29%
Market Cap
$130.64 billion
Rev. per Employee
$607,486
loading...
/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 261.30
+1.41 +0.54%
Volume: 17.37M
Aug. 13, 2020 4:00p
P/E Ratio
31.92
Dividend Yield
N/A
Market Cap
$740.24 billion
Rev. per Employee
$1.57M
loading...
/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,161.02
-1.22 -0.04%
Volume: 3.15M
Aug. 13, 2020 4:00p
P/E Ratio
121.50
Dividend Yield
N/A
Market Cap
$1583.93 billion
Rev. per Employee
$359,671
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 460.04
+8.00 +1.77%
Volume: 52.52M
Aug. 13, 2020 4:00p
P/E Ratio
34.96
Dividend Yield
0.71%
Market Cap
$1932.76 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/202353025/composite
US : U.S.: Nasdaq
$ 481.33
+5.86 +1.23%
Volume: 3.01M
Aug. 13, 2020 4:00p
P/E Ratio
81.21
Dividend Yield
N/A
Market Cap
$209.69 billion
Rev. per Employee
$2.22M
loading...
/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 1,516.65
+9.41 +0.62%
Volume: 1.12M
Aug. 13, 2020 4:00p
P/E Ratio
33.83
Dividend Yield
N/A
Market Cap
$1024.96 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 1,518.45
+11.83 +0.79%
Volume: 1.46M
Aug. 13, 2020 4:00p
P/E Ratio
33.87
Dividend Yield
N/A
Market Cap
$1024.96 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 208.70
-0.49 -0.23%
Volume: 22.59M
Aug. 13, 2020 4:00p
P/E Ratio
36.23
Dividend Yield
0.98%
Market Cap
$1583.08 billion
Rev. per Employee
$902,473
loading...
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