<p>For the past year or so, Qualcomm (NASDAQ: QCOM) has been one of the more volatile and divisive stocks in technology. After several years of in-line trading, the Qualcomm stock exploded higher in April, fading, gathering and fading again.
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The initial catalyst was the company’s surprising deal with Apple (NASDAQ: AAPL). The smartphone maker had withheld royalties during a legal dispute that threatened Qualcomm’s lucrative position in the iPhone.
The solution to the dispute paved the way for Qualcomm’s story to focus on its role in 5G (fifth generation) wireless launch. Although the subsequent parabolic rally faded somewhat, the QCOM share had reached a new record level in November – and almost doubled from its early years.
Of late, however, that story has been overshadowed by sales in broader markets that have pushed semiconductor stocks. Qualcomm shares fell 10% last week alone, roughly in line with the Philadelphia Semiconductor Index and the NASDAQ Composite.
Back at $ 78, QCOM looks to be on a bending point. Through the company’s own recognition, the 5G story will take some time to play out. In the meantime, bulls are likely to see market-driven sales as an opportunity. Bears perceive a much-needed correction. I have generally leaned towards the bearish case, but at this point I will grant that bulls can also make an exciting case.
The case for Qualcomm Stock
The case for Qualcomm shares at this time is relatively simple. Little, if anything, has changed in the story. Qualcomm should still have strong growth in the future. Apple business is returning to normal. Qualcomm is in a similar dispute with the Chinese smartphone manufacturer Huawei, which can be resolved at some point. 5G will drive more chip sales at higher prices.
As I mentioned last year, Qualcomm’s three-year target proposes that the company clear $ 6 in adjusted earnings per share before the financial year 2022 (end of September). Analysts actually look at profits back at that level with FY21, with unanimity proposing an EPS of $ 6.11, rising to $ 6.36 the following year.
At the latter figure, QCOM trades with only 12.3x results. It hardly seems a stretch to imagine that the Qualcomm share will get a 15x multiple, which would move its share price close to $ 100 within two years or so. Add an attractive dividend that currently yields 3.17% and investors are looking at annual returns in the 15% range.
Better-than-expected gains, or a higher multi-year period, could lead to further upward trend. And even here, analysts are more bullish, with the average price target being just over $ 100 – on a 12-month rather than a 24-month basis.
Revenue keeps history intact
It is the story that led QCOM to a new record high in mid-January. And again, these would mean that you have to spend for these processes. The financial results for the first quarter last month came well ahead of analysts’ estimates.
The guidance for Q2 also looked strong. Qualcomm said in the revenue interview that the result for the third quarter would be in line with that during the second quarter, which suggested a certain modest disappointment in relation to existing Street expectations. But as a bullish analyst rightly noted, “upside in March [relative to consensus] was more than the downside in June. ”
The three-year goals remain intact per call. New 5G phones from both Apple and operating on Alphabet’s (NASDAQ: GOOG, NASDAQ: GOOGL) Android operating system should increase revenue and profits from the fourth quarter.
And yet the QCOM share fell by 10% in one week, has fallen by over 11% so far in 2020 and has fallen almost 19% from the January peaks. The story is the same; the price is not. For bulls, it is undoubtedly a possibility.
Are the risks rising again?
Still, the risks remain. The same risks that pushed the QCOM stock below $ 50 on several occasions in recent years have reappeared in 2020.
The Apple relationship is still cool. Apple acquired the 5G modem business from Intel (NASDAQ: INTC) in an attempt to get production in-house – and possibly oust Qualcomm. Last month it was reported that the hardware giant is doing the same with antennas. Android phones still have a majority market worldwide, but declining Apple revenue is a headwind that could offset the benefits of 5G adoption.
Meanwhile, 5G shares elsewhere in the world are not on fire. Nokia (NYSE: NOK) has made a profit of 5.7% compared to so far, but that comes after the share reached a six-year level in November. Ericsson (NASDAQ: ERIC) is less than 8%. Cisco Systems (NASDAQ: CSCO) has decreased by 16% YTD.
5G is a possibility – but its revenue is not purely incremental. Qualcomm will, of course, lose revenue from chips designed for older models. To be sure, the new standard can lead to faster adoption. It would eliminate the headwinds of the extended smartphone replacement cycle that put pressure on QCOM in recent years. It is still possible that investors were, and remain, at least to some extent too optimistic.
Perhaps most importantly, regulators are reviewing Qualcomm again. The company has faced antitrust investigations around the world, and it may have another on its hands. The company revealed last month that the European Union is investigating its sales of radio frequency chips, which it is trying to collect through modem sales.
Qualcomm has already paid billions of dollars in fines worldwide. It could be a risk for another fee – and an obstacle to a core part of its 5G strategy.
The debate continues
Forced to choose, I would bet the QCOM stock rises from here. Valuation is more than reasonable. The company’s dominance in 5G should drive growth. Regulatory movement is a problem. But even a $ 1 billion fine can be handled in connection with a market capitalization that is only a modest $ 90 billion. The worst case scenario – a fundamental overhaul of the company’s operations, in line with the Microsoft (NASDAQ: MSFT) liquidation in 2001 – seems unlikely.
But forced to choose, I would probably look elsewhere in the sector – or in technology – for a “buy dip” candidate. The risks here are real. A profit of 12 times multiple to FY22 sounds cheap, but the QCOM stock has often been traded at a lower multiple to futures earnings over the past decade.
Qualcomm will surely have a chance to prove its skeptics wrong. Significant growth is likely to begin in Q4 as 5G gains momentum. Provided that US equities stabilize, it may be enough to test the height in January again.
Still, Qualcomm needs to deliver and manage a still volatile business in a still volatile market. There is a lot to ask – and the rating here is not yet remarkable for me personally to be able to take that game.
Vince Martin has been covering the financial industry for nearly a decade for InvestorPlace.com and other stores. He has no positions in any of the mentioned securities.