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Qualcomm’s Fortune Turns as the Chipmaker’s 5G Business Grows Rapidly
by Daniel Newman | November 19, 2020

The technology industry has been a bright spot for the global economic recovery from the effects of the coronavirus lockdowns.

Mobile chipmaker Qualcomm QCOM, -1.13% said Wednesday after the stock market closed that fiscal fourth-quarter adjusted revenue rose 35% and earnings per share soared 86% from a year earlier. The company’s stock rose as much as 14% on Thursday.

After Qualcomm reported earnings, I had the opportunity to speak with CEO Steve Mollenkopf about the results and the company’s outlook. While the conversation details were off the record, I gleaned several key insights about the company’s path forward and why I believe Qualcomm has a runway for growth.

5G has Found its Footing

This past quarter, Apple AAPL, -1.13% was the latest major original equipment manufacturer (OEM) to announce its 5G devices, and like just about all the others, Qualcomm technology is at the heart of the lineup.

Qualcomm, however, is seeing its 5G business rapidly expand on both the chip and licensing side. It has over 700 mobile devices announced or in development using its Snapdragon 5G chips and secured long-term licensing agreements in place with every major handset OEM, equating to over 110 5G agreements.

5G device availability grew 64% in the past quarter alone. Its still early days for 5G, and the ramp of Apple and other handset makers will continue to influence Qualcomm’s future earnings results.

5G device availability grew 64% in the past quarter alone. Its still early days for 5G, and the ramp of Apple and other handset makers will continue to influence Qualcomm’s future earnings results.

RF is a Big Business

Qualcomm’s RF Front End (RFFE) business doesn’t receive as much attention as other parts of the company. Still, to deliver the promise of 5G, there are significant technical hurdles that have required Qualcomm to deliver improvements to RFFE, which has yielded a growing revenue stream for the company.

This has also increased OEM preference for Qualcomm’s reliable 5G technology to incorporate into their devices. The result is that Qualcomm is now one of the leaders by revenue in the RFFE business as the company continues to put pressure on legacy providers in this space, such as Broadcom AVGO, +0.00%, Skyworks SWKS, -1.93% and Qorvo QRVO, -2.74%. In fiscal 2020,

Qualcomm grew the RFFE business by nearly $900 million — from $1.48 billion to $2.36 billion, making this growth component of Qualcomm’s chip business more than 10% of its revenue.

Regulatory Battle is Over

The most compelling reason why Qualcomm’s outlook is so strong is the company’s ongoing saga of regulation and litigation has seemingly run its course. Amid multiple lawsuits and regulatory battles involving the Federal Trade Commission and Apple, Qualcomm had a period where its entire business model appeared to be at risk.

The relationship with Apple has been rectified, paving the way for Apple’s recent 5G rollout. With the FTC, an initial district court ruling against Qualcomm threatened to force the company to renegotiate many of its licensing agreements under less favorable terms. This would have likely hurt its highly profitable licensing business, and consequently also forced the company to make hard choices about what portions of its multi-billion-dollar long term R&D pipeline to scale back.

After the 9th Circuit Court of Appeals overturned the ruling, the FTC called an “en banc” hearing that could have put the case back into question. This request was denied, which indicates an apparent end to the saga.

These two legal challenges for Qualcomm were the most visible, but the company also negotiated its way through tough regulatory battles in China, Korea, Taiwan, Japan and Europe. This kept the stock price repressed for much of 2018 and 2019, but since the rulings turned in Qualcomm’s favor, it has seen a substantial upturn.

I believe regulators, domestic and abroad, have their attention on “Big(ger) Tech,” meaning Qualcomm, for now, can focus more on innovation and delivering on its growth opportunities.

Innovation Secures Strength

A final takeaway for me is that Qualcomm’s critical contributions to 5G put the company on solid footing regardless of the outcome of this week’s national presidential election. Some may have forgotten that in 2017, amid a hostile takeover attempt by Broadcom, Qualcomm was given a reprieve when the Trump administration stepped in to end Broadcom’s efforts based upon national security interest and the desire to protect one of the United States’ mobile innovation leaders.

Mobile leadership continues to play a major role worldwide, and Qualcomm’s contributions to both the current and future standards will be material, making the company important to the country’s innovation leadership ambitions — especially as our relationship with China continues to be, at best, unpredictable.

Qualcomm’s earnings results were outstanding. However, I believe the company has a continued path to growth as 5G scales, its revenue sources diversify, and the wave of regulatory and legal battles has, at least for the moment, subsided.

The original version of this article was first published on MarketWatch.

Daniel Newman