QUALCOMM, Inc. (QCOM) Stock Is not One to Buy on the Dip

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The battle between tech giants QUALCOMM, Inc. (NASDAQ:QCOM) and Apple Inc. (NASDAQ:APPL) is one of the most interesting, most influential, and yet little talked about story-lines in the stock market so far in 2017. In fact, unless you follow QCOM stock or AAPL stock closely, you probably aren’t all that aware of the billion dollar dispute between these two companies.

Qualcomm, Incorporated (QCOM)
Source: Shutterstock

But make no mistake. The magnitude and potential long-lasting implications of the dispute are why Qualcomm has shed about a fifth of its market cap over the past year.

Does that make QCOM stock, which now trades at a fairly cheap 13.6-times forward earnings multiple, a buy on this dip?

I’m not sure about that. Here’s why.

Qualcomm vs. Apple

Here’s a fun fact: Qaulcomm has tripled its revenues over the past 10 years.

How? The smartphone.

Qualcomm’s business model has two parts. On one side, the business sells hardware like modems and chips. On the other side, Qualcomm has smartly put together this huge portfolio of smartphone-related patents. Because these patents deal with the core technology of how smartphones send and receive data, Qualcomm earns royalties on pretty much every smartphone ever sold.

From this standpoint, the Qualcomm growth narrative is the smartphone growth narrative.

Or, at least, it was.

Smartphone makers are tired of paying this Qualcomm tax. They think QCOM has abused its market dominance for too long, is taking too high of a royalty, and is riding on the coattails of other corporations’ innovation. Now, those smartphone makers are fighting back.

Late last year in South Korea, the home country of smartphone maker Samsung Electronics, Qualcomm was fined $853 million by antitrust regulators for “monopolistic” practices. Shortly thereafter, similar anti-competitive accusations were made against Qualcomm by the US Federal Trade Commission. Then Apple sued and cut off royalty payments.

Now, Apple is preparing an all-out pivot away from Qualcomm. The tech giant is reportedly looking to build its own smartphone chips.

All in all, it has been a messy past several months for QCOM. Revenues are falling, profits are eroding, and the risk of further operational degradation is seemingly high.

Can Qualcomm Stock Head Higher?

It’s tough to see how Qualcomm comes out of this radical change in the wireless chip market without a considerable dent in its operating business.

Regardless of how the legal dispute with Apple settles, Apple will almost assuredly continue to reduce its dependence on Qualcomm. That’s a sizable chunk of lost business. Moreover, Apple is a leader in the wireless market, so any moves Apple makes to lessen dependence on Qualcomm will likely be mirrored by other other smartphone makers.

Gradually, it appears as though Qualcomm’s dominance in the wireless chip market is coming to an end.

That is an unfortunate reality for a stock that really isn’t all that cheap by historical standards. QCOM stock currently trades around 13.6-times forward earnings. That really isn’t that cheap considering QCOM stock’s average forward earnings multiple over the past 5 years is 13-times.

Considering earnings growth is anything but guaranteed in this dynamic smartphone manufacturing environment (earnings are expected to go nowhere over the next several years), a 13-times forward multiple feels pretty full. If you apply that forward multiple to fiscal 2019 earnings estimates of around $4, then you get a 2-year price target of about $52.

Qualcomm stock trades right at that level today.

Bottom Line on QCOM Stock

In other words, the bull thesis on QCOM rests on one of two notions. Either forward earnings estimates are exceptionally low, or the market is going to start valuing QCOM stock far above its historical average.

All things considered, it’s unlikely either of those things are true.

Consequently, the best thing to do with QCOM stock is to just stay on the sidelines until the future is more clear.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/qcom-stock-buy-dip/.

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