Now it may be time to take a profit in the Qualcomm share

<p>So far in 2020, the Qualcomm (NASDAQ: QCOM) stock has fallen by about 13%. However, that number tells only half of the story. On March 18, the stock reached a 52-week weekly high of $ 58. Now it hovers around $ 76. In other words, in about five weeks, the chipmaker’s shares have increased by about 31%.

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When we start a big profit week, long-term Qualcomm shareholders wonder who can ultimately win the tug-of-war between the bulls and the bear for the rest of the year. The company will report Q2 FY20 results on April 29.

I would not suggest investing in the leading mobile chip giant in the long run. However, if you do not currently own Qualcomm shares, you may want to wait before making new capital in the company. Due to the recent rapid price increase in the next few days, there will probably be volatility with a declining bias in the shares. Potential investors may consider adding the company to their portfolios if the price drops to $ 70 or lower. Here’s why.

How Qualcomm Makes Money

Ordinary InvestorPlace readers would best know Qualcomm for its Snapdragon suite of System-on-chip (SoC) semiconductor products that support smartphones.

The Group’s other main source of income is royalties and licensing of mobile phones. Qualcomm’s patent licensing department collects royalties from 3G and 4G technology that it helped invent. These royalties have been its competitive advantage over the years.

Qualcomm applied for its first commercial code division multiple access (CDMA) patent in 1986. And it began licensing its CDMA patents in 1990. In 1993, the American Telecommunications Industry Association established CDMA as a standard for cellular telecommunications. Since then, the company’s innovations and licensing revenues have flourished.

Many other companies, including tech giants, need to obtain a Qualcomm license. Its customers include Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Samsung (OTCMKTS: SSNLF).

According to the company, revenue from Samsung accounts for more than 10% of the group’s revenue. Similarly, revenues from Hon Hai Precision Industry, which is traded as Foxconn Technology Group, and other suppliers to Apple, account for more than 10% of the Group’s revenues.

For many chip and technology companies, 2020 would be the year for 5G. However, the COVID-19 pandemic has understandably taken over so many aspects of life for both citizens and businesses.

However, it would be important to remember that life and technological development will continue for the rest of the year. And Qualcomm is likely to play a dominant role in 5G and replicate its success with 3G and 4G mobile networks. Many analysts agree that the prospects for 5G modems used in smartphones are extremely strong

In fact, management sees Qualcomm as “the driving force behind the development, launch and expansion of 5G.”

During the last decade’s mobile revolution, Qualcomm’s chips enabled device connectivity for billions of people worldwide. And the management’s previous results can provide an important context when we evaluate how Qualcomm’s future in technical leadership and innovation can turn out.

The pandemic, China and the Qualcomm share

Despite Qualcomm’s long-term fundamental appeal, investors have been concerned about its exposure to China. Currently, about half of the revenue comes from China (including Hong Kong).

In general, China means both the demand and the supply of chip stocks. The country consumes more than 50% of all semiconductors manufactured worldwide. In addition, many technology companies either have manufacturing facilities in China or use Chinese companies in their supply chains.

At the height of US-China trade in 2018 and 2019, Qualcomm was one of the first companies to warn of the effects of tensions on its results.

In early February 2020, at a conference call following the announcement of the Q1 results, Akash Palkhiwala, Qualcomm’s CFO, said that management saw “significant uncertainty” about the impact of the coronavirus on demand and the supply chain. Based on the information we currently have, we are expanding and reducing the lower part of our guidance area. ”

Later, on April 16, China announced that its first-quarter economy fell for the first time in records. Its gross domestic product (GDP) fell by 6.8% compared with the previous year. During the fourth quarter of 2019, the country had grown by 6%.

And between February and now, we have an important part of the global economy in a deadlock.

Therefore, recessions in China or the world may have further negative effects on the Group’s revenues and business prospects during the rest of the year.

What you can expect from the second quarter results

In 2019, as the leading provider of mobile SoC, weak smartphone sales had been a major problem for the company. Nevertheless, QCOM shareholders could overlook the soft sale and on January 17, 2020, the stock price pushed to a 52-week high of $ 96.17.

When it reported Q1 results in February, it beat analysts’ estimates. Quarterly revenue was $ 5 billion, and Qualcomm reported 99 cents a share.

Investors, however, did not think the results were strong enough to inject new capital into the stock. Since then, the share price has been on a downward trajectory.

When the company reports Q2 results, Street will analyze three main segments:

QCT (Qualcomm CDMA Technologies): semiconductor operations, over 71% of revenues QTL (Qualcomm Technology Licensing): licensing operations, approximately 28% of revenues QSI (Qualcomm Strategic Initiatives): makes strategic investments, less than 1% of revenues

As the figures above show, QCT Qualcomm generates most of its revenue from the sale of mobile chipsets. Still, wireless patents make the most of the profits. In other words, the group’s higher-margin licensing department supports the growth of its lower-margin chip manufacturing business. Its portfolio of wireless patents is the largest globally.

If China or other countries see an economic downturn during the rest of the year, its revenues and revenues are likely to be affected.

Qualcomm is a high beta stock that tends to be particularly choppy around the release date of revenue. Therefore, investors should be ready to embrace more volatility and have increased risk tolerance in the coming days.

And if you are a short-term investor, you may want to consider taking a risk at this point.

Investor Takeaway on Qualcomm stock

Thanks to the diversified revenue stream and the strength of its technical offering, I believe that the Qualcomm share belongs to a long-term growth portfolio.

But in the end, investors should always base their decisions on individual risk / return profiles. Due to the impressive rise in the QCOM share price since March 18, investors with paper gains can now call the cashier.

Alternatively, you can also consider securing your position with covered calls. For example, ATM talks on June 19 would offer investors some downward protection and enable them to participate in a potential upward movement after the dividend.

Finally, those who do not own Qualcomm shares may consider buying the company at an upcoming dip. Long-term investors would also benefit from the current dividend yield of 3.4%. Income investors know that they can increase their returns by reinvesting dividends from high-yielding stocks. Qualcomm has a history of increased dividends. And the company has just announced a modest dividend increase for 2020. The dividend of 65 cents per ordinary share will be paid on June 25 to shareholders who are record-breaking at the end of operations on June 4.

In two to three years, I expect the Qualcomm share to reach new highs.

Tezcan Gecgil has worked in investment management for over two decades in the United States and the United Kingdom. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) degree. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially likes to set up weekly calls for income generation. At the time of writing, she had no position in any of the above-mentioned securities.