Qualcomm: Inflection And Two-Decade Breakout

Qualcomm (Nasdaq: QCOM) has been a wild ride. But the 5G upcycle should help the shares make a decisive breakout on the chart. Add to that - Apple (Nasdaq: AAPL) comes on big in September after being much smaller for Qualcomm recently. I think the Street numbers are low. Upside surprise should drive the stock price higher.

First, For Those Who Say You Missed It...

I know there's going to be someone saying "it's already at $80-90, you missed it, now you tell me?!" For those commenters, we actually made this our biggest position in our model portfolio back in early April and after a huge jump exited pretty close to where we are today.

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We didn't care that the stock was already up 10%-15% on the Apple news when we entered. Qualcomm and Apple came to an agreement and the stock went ballistic.

This was a pretty fun time for everybody on chat.

We bought the initial 5% of a 10% position in our model portfolio. The news was too big and Qualcomm promised something like $2.00 in extra earnings.

We didn't like the quarter that reported thereafter so exited.

But now we're leaning in again.

Two-Decade Big Breakout Coming: What More Do You Want?

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This stock is looking to make a two-decade breakout. Breakouts are important generally but I have to think a two-decade breakout is something worth noting.

You can see my very official markings identifying the last time Qualcomm reached these levels. (A note, those official markings can't be done by the charting software. I have a special proprietary mechanism to insert them.)

Really $80 was already a major breakout to levels not seen since that 1999-2000 spike. But if we go above $100 I think it will be a big force for stock momentum.

Oh, You Wanted "Inflection" Too, OK, Here You Go

The company gave guidance for the December and March quarters. Here's their guide for the December quarter - Fiscal Q1.

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And their guide for the March quarter was given in their last earnings conference call. Here's what they said:

"As we look beyond our fiscal first quarter, we see a significant inflection point for QCT as we expect to realize the benefits from the ramp of 5G handset launches. In the fiscal second quarter, we anticipate QCT revenues to grow in the mid-teens sequentially and QCT EBT margin to return to the mid-teens."

I've been in this business for two decades-plus.

The sweetest word for institutional investors is the word "inflection." They love inflections. It means things are about to go rocket-ship, hockey-stick, whatever you want to call it.

The companies call it inflection and that's what the largest funds are looking for. Not all of the largest funds, only the ones who will move their money in a big way faster. So if this inflection happens I believe you're going to get a lot of investors piling in.

But there's more. (I hope I don't sound like a Ginsu commercial. All rights reserved for Ginsu and they are not paying me to slip in their name in this article. You'll see in disclosure I have no immediate relatives on the board of Ginsu.)

But there's more. Not only do you get a 20-year breakout. Not only do you get an inflection. But for a limited time only I'm offering you a big upside surprise potential. (Too many Ginsu ads as a kid I guess).

I think there's potential for a big upside revenue surprise. I'll show you why.

Adding it up here's what the guidance looks like.

Year-over-year their blow-out inflection is yielding a whopping 2.58% year-over-year revenue growth rate. That's not so whopping, I guess, right? I agree.

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Source

When you add up the company's "inflection" and mid-teens sequential growth (growth from fiscal Q1) for QCT, you don't get much. By the numbers it's not so thrilling.

But There's More, Upside Surprise

Let's look at the last 4G ramp. That was 2011.

Here's the revenues for Qualcomm in 2011.

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Qualcomm just guided the March 2020 quarter with the 5G ramp a whopping 2.58% year-over-year growth rate.

But the March 2011 quarter with the 4G ramp was up a really-really-whopping 45%. That doesn't make the 2.58% sound so whopping right?

Yes, this time is very different than 2011.

Back then the smartphone market was in growth mode. Now it's not.

But what's better this time is there are so many more countries and OEMs launching than there were in 2011. Another benefit is that China didn't roll out 4G for years after 2011. This time they are launching simultaneously.

So, yes the market's growing slower than the 2011 market. But the rollout appears to be much bigger this time around.

Look at this deployment 5G vs. 4G.

This was from a recent analyst day presentation from Christiano Amon who heads up semis for Qualcomm.

He shows that 5G is rolling out in 10X the amount of operators and OEMs. I have to believe that should drive growth bigger than their 2.58% year-over-year growth projections.

And there's China this time too.

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And this time instead of China being a no-show in 2011, they already are seeing pre-launch sign-ups.

So you have 10X the amount of OEMs and service providers launching with 5G plus you have a tiny little China launching.

I think there's a chance that 2020's 5G launch can at least come a little closer than Qualcomm's 1/20th expectation versus 4G.

Oh, Whoops, Forgot To Mention Apple. Heard Of Them?

Remember Qualcomm-Apple's multi-year court battles. That meant Apple was a big fat zero for Qualcomm while they were posturing.

Here's what they said on last earnings call,

"Now, going back to the outlook in '20, we talk a lot about the dynamics on Q2, but maybe to add to the prior question, you should expect as we get into the second half of '20, then we're going to see the addition of Apple volumes and so that's, you should think about really a 5G ramp for Qualcomm in 2020."

You heard of Apple, right? Well, they are going to see the additions of this new customer Apple.

Before Apple went to zero for Qualcomm guess how big they were?

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Above is Qualcomm's 10K telling you that Apple was a 40%-49% customer over the period 2014-2016.

Guess how that looked more recently? A big fat zero...

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Qualcomm says they "did not record any revenues in fiscal 2018."

The company said Apple accounted for 10% of revenues in fiscal 2019 but that may have included some catch up spend. They went on to say in their 2019 10K:

"We expect to begin recording revenues for new chipset models under our recently announced multi-year chipset agreement with Apple in the second half of fiscal 2020."

They plan to "begin recording revenues" from Apple for chipsets. That sounds pretty big no? New revenues from Apple.

Sum It Up

Two-decade breakout, check.

Inflection, check.

5G vs. 4G upside, check.

Big revenue upside potential, check.

Oh, and "adding" Apple, check.

Conclusion

This sounds like Qualcomm has upside potential. It should be able to get the stock up over that $100 mark and then keep going.