My article then, Qualcomm (Nasdaq: QCOM) Is Racing Ahead. Its Stock Is Dead In The Water. What Gives?, QCOM 2017-05, provided a background of what makes Qualcomm different and what made it timely then.

I said then that Qualcomm was of high quality in high tech with high operating and net margins but noted that it was not an easy stock for many investors to wrap their mind around what Qualcomm provides.

As consumers, we might respect a product or service and get excited about the company's stock. Amazon (AMZN), Google (Nasdaq: GOOG) (GOOGL), or Netflix (NFLX) are excellent examples of how many individual investors have made very good money solely on the basis of believing in the product. (Of course, when some of these once-hot ideas with little competition go south, as Polaroid, Eastman Kodak and scores of others have done, the pain can be pretty intense!)

When a company supplies the backbone for what other companies do, however, we can't simply use the Peter Lynch sniff test and say, "Gee, everybody's using Facebook (Nasdaq: FB). I'll look into it." Maybe that partially explains why Qualcomm is more difficult to understand, but it is worth it to make the try.

Part of Qualcomm’s investor-identity problem is that they are superb technologists who do not always communicate at an investor-friendly level. Here's an example from their website as of 16 June 2019. In discussing their latest second-generation 5G modem, they say:

“Snapdragon X55 5G Modem -- Second-generation 5G modem with integrated multi-mode support, designed to deliver breakthrough wireless performance and accelerate global 5G rollout.

“The Qualcomm Snapdragon X55 5G modem is a single-chip multi-mode solution designed to allow OEMs to build 5G multimode devices for a new era of connected experiences.

“The Snapdragon X55 5G modem supports virtually any combination of spectrum bands and/or modes: 5G mmWave and sub-6 GHz, standalone and non-standalone modes, TDD and FDD, spectrum sharing, LTE and legacy modes (3G, 2G). This is designed to enable OEMs to bring blazing fast connected devices to global networks in nearly any form factor.”

That is a wonderful copy, I suppose, when selling original equipment manufacturers on the characteristics of the product. I'm certain this stuff fires the imagination of the PhDs that Qualcomm wants to recruit from elite universities and the B2B corporate clients it wants to attract.

But Qualcomm, really, if you want to excite interest among investors willing to buy and hold your shares forever then you need to sell the sizzle, not the steak! Forget specs, what is it that you and only you invent and then produce for sale or licensing to make peoples’ lives better?

You need people to say, “Oh, I see – you make communication and navigation work at roughly the speed of an engaged human mind. You make driving safer because all those sensors that signal trouble can be triggered immediately and acted upon immediately, even faster than human reflexes would be able to. Your products make my life easier, safer and more efficient.”

Even if you move through the website to get to Investor Relations, to be able to see a recent investor presentation you have to agree to a Disclaimer and Cautionary Note Regarding Forward-Looking Statements before you are allowed to view the presentation.

(Given QCOM’s various problems with Chinese theft of intellectual property, having its most recent acquisition attempt denied, and lawsuits and counter-suits with Apple (AAPL), to mention just a few, I understand their paranoia. However, other firms post the same disclaimers with far fewer words and less confusion.)

Once you actually open their most recent presentations to investors you will find only the transcripts of quarterly earnings calls and Powerpoints of their fiscal profile – what product areas contributed to their bottom line, their total revenues, etc. Standard balance sheet and income statement stuff.

Since they don’t provide more, I will. Here's what Qualcomm is all about:

They make leading-edge processors that allow your smartphone to do what your smartphone does. There's more computing power in this one little processor chip than there was a few years back in a huge bank of mainframe computers.

These cellular modems now allow you to take calls, make calls, watch movies, send and receive texts, and otherwise communicate with your friends and colleagues around the world. And with the latest iteration of the chipsets that allow your phones to do all that, the fifth-generation (“5G”) chipsets may make all that possible simultaneously if requested, and faster than ever.

Source: Samma3a.com

Qualcomm’s Bluetooth technologies and products enable listening to music, dictation, hands-free communication while driving and so on. A step beyond Bluetooth is Qualcomm Halo. Halo technology eliminates the need for plug-in cords for more accessible recharging in electric and hybrid vehicles.

Wi-fi products. Qualcomm has created and continues to create products that make wi-fi connectivity smoother and faster than ever before. Electrical outlets become broadband connection points, creating high-performance networks by simply plugging in. The company's WiPower wireless charging eliminates the need for multiple chargers and wires.

Qualcomm's products are saving us time and changing the way we interact with our environment and our entertainment.

Driving? Qualcomm has dozens of patented applications that provide connectivity, entertainment, navigation, safety, and wireless electric vehicle charging solutions.

Healthcare? Qualcomm is field-testing an 11-layer authentication process that will absolutely safeguard patient information and allow medical information to be shared in seconds between doctors and, via video on any device, between doctor and patient. Do you want to see America's healthcare costs plummet and those who truly need in-office visits get them more easily? Video medicine provides at least part of the solution.

So why isn’t Qualcomm stock soaring like an eagle? Most likely because Qualcomm is like the old Bell Labs or Xerox's (NYSE: XRX) PARC. It designs, integrates, and manufactures, but it also licenses a great many of its original inventions. This has created numerous problems in the past where, for instance, Chinese partners "might have" reneged on their obligations and when QCOM objected, the full force of the leaders of the People’s Republic came down on it, charging all manner of what many believe, in retrospect, were spurious allegations.

It's a cost of doing business. Qualcomm will always strive to protect its intellectual property and others will claim, truthfully or not, that they invented something just like it or they have an adjunct to it and shouldn't pay for the original product or innovation. If you are the only company that produces x, and x is light years ahead of the competition, of course, you will be labeled monopolistic!

Just a few weeks ago, Qualcomm and Apple settled their differences and the stock took off like a rocket. This wasn’t the first time this has happened to Qualcomm’s shares. However, just as QCOM was celebrating the end of paying lawyers gazillions of dollars to defend their turf, the US government decided to name one of Qualcomm’s biggest customers, Huawei of China, a threat to national security.

Huawei is not just a customer. It's also a competitor. The allegations are rampant and well-documented that Huawei has licensed Western technologies, reverse engineered the chips (not exactly accurate in describing the process but descriptive and understandable) and then undercut the price of the similar product by enough to steal much of the business from its true inventor. Once they have then cornered the market or at least the bulk of it, they can raise the prices to levels far above what they would have been in a free and openly competitive market.

Fans of the original railroad barons or the oil cartels will find this a familiar story. The process is the same. The difference is that these disgusting fellows were merely venal. In the case of the People’s Republic leadership, they want the money to flow into these state-owned or state-controlled entities in order to raise their offensive weapons capability and build their military prowess.

As an investor, I want to see good dividends and capital gains. As a geopolitical analyst and realist, I don’t want to see monopolistic and/or mercantilist autocracies dictate terms to the rest of the world. I do not believe the silly notion that Huawei is owned by its employees. (If you check Investopedia’s entry on Huawei answering the question “Can You Invest in China’s Huawei” here you will find the standard party line (literally!) that “Thirty-one years after its founding, Huawei Technologies Co. remains a private entity fully owned by company employees.”)

Huawei is a company effectively controlled by the CPC (Communist Party of China) and one which the US and numerous other western intelligence agencies are convinced is using specialized technologies to transform the transistors, software and/or lines of code in the chipsets it buys from companies like Qualcomm in order to create mischief or malfeasance in the end product – like Huawei smartphones – to the detriment of others.

Let us not make more of this than is there, of course. Network hardware and software will always have vulnerabilities that can be exploited and may, therefore, be a threat to the national security of China, the US or any other nation. Once you have, as we do today, millions of embedded transistors and software with millions of lines of code for a single chipset, the possibility of current or future malfeasance will be a threat – whether from Huawei or Qualcomm or any other firm.

If there is a difference, it is that the transparency of a US corporation with solely a profit motive, and its (by law) cooperation with US intelligence technical experts, would be committing corporate suicide if they were dumb enough to produce such products. Even if Huawei is not committing the precise crimes for which it stands accused, any firm that has such ties to the CPC and its military, and supplies such a large percentage of the market for components of telecommunications networks, is of concern. The US is not telling Huawei to close its doors, merely that the doors of US technology transfer are being closed to it.

I think we need this background to reasonably assess Qualcomm’s future prospects. Indeed, I'm of the belief that QCOM is likely to suffer, as will its stock, as a result of the Huawei indictment and will suffer even worse if there's a conviction.

It's true that only about 3% of Qualcomm’s business is with Huawei directly, but what about the second and third order business? How much more exposure is there if Huawei is cut off from Qualcomm’s advanced technology but other buyers in Germany or Brazil or wherever are not? Can they then trans-ship Qualcomm product? If not, how much more of a hit will QCOM’s revenue and earnings take?

At some point, I believe in this year or early next year, this will all shake out. If Huawei is found guilty, sanctions will be made and private meetings will be held with both friendly and unfriendly nations. I don’t have the time in this article to even consider the implications of China’s censored Internet that dictators around the world find of great value (versus the free world’s open Internet model) but that will enter into this discussion as well.

I think all this will damage Qualcomm moderately and only for the short term. If I'm correct, and if QCOM continues to maintain its pole position in 5G, I will buy more Qualcomm at 57.50, or 47.50, or anywhere else it might decline to as investors overreact. QCOM is, in my opinion, the premier company in the world for 5G exposure. And its financials are exceptional:

Trailing revenues are $21.23 billion. Analysts expect this to increase significantly as a result of the Apple settlement.

Trailing earnings are $2.33 billion. This is also predicted to increase by 30-50%.

The current PE is 38. The forward PE is projected (analyst consensus average) to be 13.

Return on equity is 31% and debt is eminently manageable.

The current dividend is 3.6%. If the stock should fall to $60-61, at which point I'm again a buyer, the dividend at cost would be 4%.

This is a big, aggressive, capable company with a powerful research and development profile. It remains on the cutting edge by hiring the best, paying them well, and creating an innovative culture for experimentation and invention. I see uncertainty on the immediate horizon and the market hates uncertainty. That is why I'm not adding to positions now. But if the stock price declines while the company is growing I will once again be a buyer in size.