Why one JPMorgan analyst says this stock could see more than 25% upside on the horizon.
Chip stocks have been on a tear this year, and there’s one stock leading the charge that JPMorgan (NYSE: JPM) analyst Samik Chatterjee says is a “top pick.”
Qualcomm (NASDAQ: QCOM) shares are up 49.55% so far this year, and Chatterjee sees the company’s 5G-related revenue accelerating with the ramp up of 5G networks and equipment beginning next year. The analyst’s base case is for 200 million shipments in 2020, with that number rising to 450 million in 2021.
Chatterjee says that, because of the increased complexity of 5G antennas and related parts, Qualcomm’s average sales prices for its chipsets should climb.
“The need to support higher frequencies, lower latency requirements, higher downlink and uplink capacity are increasing the complexity of a 5G baseband relative to 4G, extending Qualcomm’s leadership position, particularly in relation to mmWave enabled smartphones,” Chatterjee wrote in a note. “We believe the additional capabilities in a 5G baseband will provide Qualcomm with incremental content growth opportunities, ranging from a few dollars in low-end 5G handsets to $10-$15 in premium handsets.”
But overall, Chatterjee believes Qualcomm’s smartphone baseband chip sales will reach $18.5 billion in FY2022, up substantially from the current fiscal year’s $14.7 billion. Of the $18.5 billion, Chatterjee sees 5G-driven revenue making up two thirds of that total.
According to Chatterjee, packaging the baseband chip with a 5G-capable radio frequency module could present an additional $3 billion opportunity for Qualcomm by 2022. The analyst also said the 5G cycle will benefit the chipmaker even beyond smartphone-component revenues.
“We believe investors have largely ignored the non-smartphone revenue opportunities that Qualcomm is geared to leverage over the next several years,” Chatterjee wrote. “These opportunities include an already building pipeline in automotive as well as opportunities in IoT devices, beyond the 5G related opportunity in small cells.”
Qualcomm CEO Steve Mollenkopf confirmed this when he said at the company’s investor day that 5G is “not just another handset upgrade cycle,” adding that the first three sectors that will embrace 5G outside of mobile phones will include the automotive industry, the manufacturing sector, and cloud gaming companies.
Other industries Mollenkopf specifically noted as ripe for 5G sales include healthcare, energy, logistics, and retail.
Chatterjee has an Outperform rating on QCOM shares and raised his price target from $97 to $108 – 27% higher than the current price.
Qualcomm has been trying to retain its leadership in the 5G chipset market with several technological feats as well as state-of-the-art product launches.
At its investor day this week, Qualcomm confirmed that it expects 5G smartphone shipments will top 450 million units in 2021, matching Chatterjee’s estimation, and roughly 750 million units in 2022.
And according to Qualcomm President Cristiano Amon, 5G wireless networks will be up and running in all metropolitan areas by next year.
“We are at the very beginning of a new technology transition, and like with every technology transition, networks have to be built, you have to have coverage,” Amon said. “However, what is great about this time is that we accelerated 5G by a year, and the device ecosystem is ready.”