Betting On 5G: Buy Qualcomm (QCOM)

There has been a lot said about trade war concerns between two of the world’s largest economies – the U.S. and China. Both countries have come out openly against various industries – from automobiles and aluminum, to soybeans, salmon, lobster, cotton and pork, it’s all on the tariff cards! But what about technology? Are investors in that sector safe?

Let’s look at how the smart money should play tech in the trade war backdrop, especially in the smartphone and internet technology domain.

QualComm Vs Huawei: History

5G technology is expected to be a game-changer, as far as internet communications is concerned. With speeds of upwards of 100x current technology, and the ability to push through more data than ever before, the future of the Internet of Things (IoT) depends on 5G.

(002502.SZ / HWL). Both have their attractions for investors, but there’s a lot of geo-political vibe associated with betting on either of them. Back in 2008, HWL was reported to have overtaken US network gear manufacturer Cisco Systems, Inc (CSCO) to become the global player in that segment. HWL recently overtook Apple Inc. to become the second largest shipper of smartphones in the world, and plans to capture the number one spot by 2020.

In early 2018, the U.S administration blocked the proposed takeover of QCOM by rival Broadcom Inc. (AVGO). To understand why that matters, we need to understand that QCOM is an American company based in California, while AVGO is incorporated in Singapore – which puts it beyond US influence. The Whitehouse suspects AVGO has close ties with China, an archrival in the 5G race. A takeover would therefore put China in an undisputed controlling position. China countered by blocking QCOM’s takeover of Dutch chipmaker NXP.

And in a twist of events, a Chinese court sided with QCOM in its patent fight against AAPL, with HWL likely to further strengthen its lead against the US smartphone giant as a result.

Recently, the headline-making arrest of Huawei’s CFO in Canada, on a request by the US, is seen as yet another sign of a conflict focused on the 5G race. Clearly, if investors want to own one (or both) of these names, they must be smart about placing their bets.

Being smart by the numbers

So, before we decide which 5G horse to bet on, let’s look at some numbers:

  • On a P/E basis, both QCOM and HWL are trading in the low to mid 20s (21.2 versus 23.61 respectively), which would probably make them equally (in) expensive
  • On a P/B comparison, QCOM (75.82) seems more expensive a bet than HWL (1.1669)
  • Comparing both stocks on a Price/Sales metric indicates QCOM (3.71) as a better bet than HWL (17.54)
  • QCOM (2.71) has a better Earnings Per Share (EPS) than HWL (0.20)

In terms of returns to investors, QCOM has lost less investor value (-7.55%) than HWL (-47.07%) over the last 1 year. Additionally, QCOM’s dividend (4.3%) versus HWLs (1.07%) makes the former a much more attractive “get paid handsomely while you wait” proposition.

A look at the Income Statement numbers gives us some interesting insights into both players financials. QCOMs reported Q3 2018 revenue as $5.8B USD, while HWLs numbers were 54.4M CNY. However, HWLs profit margin (0.82%) outshone QCOMs (-8.50%).

The numbers on the Balance Sheets show us that QCOMs liabilities stand at $32B USD, while HWL has total liabilities of 385M CNY. But HWL has a more favorable Debt to Asset ratio (0.13%) than QCOMs (50.08%).

(Note: Investors should factor into their “betting equation” that the trading currencies are different (QCOM=USD, HWL=CNY) for both stocks, but the metrics presented are relative – i.e. based on the respective trading currencies)

Being smart about the future

If all that number-crunching has your head spinning, let’s stop and look into our crystal ball for a moment. According to Huawei’s corporate website, almost 50% of the company’s revenues came from outside of China. And with the geo-political tensions between China and the US, revenues from the Americas region have already declined by nearly 11% last year. With heightened tensions this year, could those numbers can decline further?

What about the rest of the non—China world? Well, under U.S. leadership, many countries, including Japan, the UK, Australia and New Zealand have indicated they’ll shut out HWL from bidding on 5G projects. While Canada has not yet announced its decision about 5G partnership with HWL, current tensions between it and China (over the CFO’s arrest) doesn’t bode well for a favorable decision.

Additionally, Huawei’s technology relies heavily on key components (chips and design software) manufactured by QCOM and other U.S. companies. If push comes to shove, and QCOM decides to pull the plug on further shipments of vital chips to one of its major customers, both entities will suffer. But QCOM will likely come out on top!

Playing it smart

While some analysts have a 1-year price target of 11.45 CNY for HWL (up-side of 154% from current 4.50CNY), and an 18% upside for QCOM (from $58.09 to $68.50), it’s hard to predict what those estimates might mean in the event of a full-scale tech-war.

Source: Yahoo.com

Looking at a 1-month price chart, one can clearly see that momentum is in QCOMs favor (HWL -13.3%; QCOM + 6.8%). The smart move would therefore be to bet on QCOM. However, an even smarter move might be to place multiple bets against HWL.

Unless something dramatic happens on the tech-trade-war front – soon! – HWL will likely descend further. It might be a shrewd move to bet on three horses – AVGO, QCOM and CSCO to give your portfolio a much greater boost.

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Author does not have investment in stock discussed in this article.

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