Chipmaker QUALCOMM, Inc. (NASDAQ:QCOM) has been on a wild ride over the past several months. The shares were in a down-trend for most of 2017 until Broadcom Inc (NASDAQ:AVGO) acquisition rumors emerged in October, sending QCOM stock from $50 to $70 in a hurry.
But then U.S. President Donald Trump essentially blocked AVGO’s acquisition attempts. Merger talks went cold. Qualcomm stock dropped. The decline continues, due to a confluence of headwinds, ranging from Chinese regulation to costly lawsuits to weak smartphone demand.
Now, QCOM stock is back at that $50 level of October 2017.
Time to buy? Getting close, but not yet. The fundamentals imply this stock isn’t undervalued yet, while the sentiment remains largely negative. Thus, the best move seems like to wait for the dust to settle.
Let’s tak a deeper look.
QCOM Has Been Absorbed In Wildness
The only way to describe what QCOM has been through over the past several months is simply “wild.”
The company has a long-festering dispute with Apple Inc. (NASDAQ:AAPL) concerning the so-called “Qualcomm Tax” which Qualcomm collects on its smartphone-related patents. Apple thinks that Qualcomm’s cut is too big. The chipmaker disagrees. As such, the two are stuck in court.
But investors forgot all about that when Broadcom came swooping in and tried to take over Qualcommm only to be thwarted by Trump.
Now, investors are once again concerned about the Apple litigation. Plus, QCOM’s proposed acquisition of NXP Semiconductors NV (NASDAQ:NXPI) is increasingly coming under challenges as China regulators seek more and more concessions from QCOM amid what has become a political battle between China and the U.S.
Qualcomm also pledged $1 billion in cost-savings following AVGO’s failed takeover attempt. Those cuts are starting now, in the form of layoffs, and layoffs are rarely a sign of good times for a company.
As if things couldn’t get any messier, the U.S. has also banned companies from selling components to Chinese smartphone maker ZTE Corp. Qualcomm is a big chip supplier for ZTE, so this ban has materially negative consequences for QCOM’s financials.
Meanwhile, the whole chip sector has been weak recently amid what is being reported as unusually weak demand from the smartphone and cryptocurrency markets. QCOM stock has naturally been dragged down with the rest of the sector.
And to only complicate things further, former QCOM Chairman Paul Jacobs, who was ousted in March after informing the company of his desire to take QCOM private, is now pushing forward with his go-private attempt from the outside.
All together, QCOM is absorbed in a wild situation that lacks clarity and doesn’t point to stable growth in the foreseeable future.
QCOM Stock Isn’t Cheap Enough On a Standalone Basis
With this lack of clarity, earnings estimates for fiscal 2019 have trended down over the past several months from $4 to about $3.75.
This down-trend should continue because it doesn’t look like lost business from ZTE or persistently weak smartphone demand is fully baked into those estimates. As such, when everything shakes out, EPS estimates for fiscal 2019 will likely hover around $3.60.
A historically average 13.5x forward earnings multiple on those $3.60 earnings implies a year-end price target of about $49.
Considering the lack of clarity regarding the company’s go-forward growth prospects, I’m not a buyer of QCOM stock above that $49 level unless Jacobs’ go-private attempt gains serious traction.
Lots of question. Not a lot of answers.
Because of this lack of clarity, QCOM stock is best avoided at current levels. But any dips into the $40’s should be viewed as buying opportunities.
As of this writing, Luke Lango was long AAPL.
