Is This Qualcomm’s Next Big Opportunity?

Qualcomm (NASDAQ: QCOM) is desperately in the hunt for new opportunities to overcome the body blow dealt by Apple's lawsuit and competition from MediaTek in smartphone chips. Not surprisingly, the chipmaker has been trying to tap emerging tech trends such as artificial intelligence (AI), smart homes, and augmented reality (AR) to find alternative revenue streams.

But the chip specialist will run into stiff competition in all these areas. Chipmakers NVIDIA and  Intel are already betting big on AI and AR, so Qualcomm's success isn't a given. However, one space where Qualcomm could mint big money going forward is in its core market for smartphone chips, thanks largely to the adoption of 5G technology.

Qualcomm tests the first 5G connection on a smartphone

In mid-October, Qualcomm tested the world's first working 5G data connection on a mobile device. The Snapdragon X50 5G modem chipset clocked mobile internet speeds of 1Gbps, though Qualcomm believes that it can eventually achieve speeds of 5Gbps by the time it is ready for shipment to smartphone companies.

The 5G connection standard is still loosely defined as the global mobile standards body hasn't yet laid out the specifications. However, the millimeter wave spectrum  band used by Qualcomm for the test is the one on of the frontrunners  on which 5G networks will be based.

Currently, millimeter waves are used only for radar  and satellite applications as they have difficulty travelling through obstacles such as buildings and rain. But they can be a viable form of 5G connection with the help of small cells that increase network coverage capacity, which is why Qualcomm believes that smartphone OEMs (original equipment manufacturers) will start selling millimeter wave-capable devices within the next two years.

This is why the company has launched a smartphone reference design to test and optimize  its "5G technology within the power and form-factor constraints of a smartphone." In fact, the reference design mimics most of the smartphones currently available on the market as it has an edge-to-edge display and is just 9mm thick. By comparison, the latest Samsung Galaxy S8 equipped with an edge-to-edge display is 8mm  thick.

Therefore, it is clearly evident that Qualcomm wants to become the first one out of the gate in the 5G chip market, which is the right thing to do given the potential.

The opportunity for Qualcomm

CCS Insights forecasts that shipments of 5G-capable smartphones will hit  100 million units in 2021 when the technology will still be in its early stages of deployment. Developed markets such as North America, Japan, and South Korea will lead the charge initially, though smartphones won't be the only devices using 5G chips.

According to the Ericsson Mobility Report, the number of 5G subscriptions could exceed 500 million in 2022 thanks to the Internet of Things (IoT) deployments and fixed-line broadband services. For instance, the automotive industry is expected to be one of the earliest adopters of 5G technology for high-speed data communication in autonomous vehicles. This is because 5G networks will provide the enormous bandwidth that will help cars communicate with other objects more efficiently as compared to current generation networks.

Therefore, Qualcomm will have the first-mover advantage in the 5G space as its biggest smartphone chip rival, MediaTek, hasn't begun testing the technology yet. Earlier this year, MediaTek struck a partnership with Nokia to develop 5G solutions, but their prototype chip will go into the trial phase only next year.

This means that Qualcomm has scored a one-year lead in 5G chips. So it won't be surprising if Qualcomm goes on to capture a bigger share of this market, which will eventually give a nice boost to the company's revenue when 5G chip sales start hitting critical mass.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Nvidia. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.