QUALCOMM, Inc. (NASDAQ:QCOM) is a big believer in the virtual reality (VR) and augmented reality (AR) markets. Specifically, the chip giant thinks that AR and VR headsets are the next big thing in the consumer technology world. Whether that is reason in itself to like Qualcomm stock is another story altogether.

Two years ago, Qualcomm introduced a virtual reality software development kit for VR headsets. Since then, the company has built on that foundation, and recently, Qualcomm just unveiled its XR chipset, a first-of-its-kind chipset dedicated exclusively for standalone VR and AR headsets (the XR stands for “Extended Reality”).

There has been a lot of buzz in the media about how Qualcomm’s XR chipset will drive down VR/AR headset prices by a whole bunch, which will in turn fuel mass market adoption of these formerly niche consumer tech products. But does that logic make sense? And more importantly, is the XR chipset a reason to buy Qualcomm stock?

I’m not convinced. Price is a big barrier to AR/VR headsets going mainstream, but there are also other barriers, like limited convenience, restricted use-cases, and niche necessity.

Meanwhile, Qualcomm stock has rallied to near $60, a level which doesn’t seem reasonable considering overarching headwinds in the smartphone market and limited growth potential elsewhere.

Here’s a deeper look:

AR/VR Is a Risky Bet

At its core, Qualcomm is betting on the fact that by lowering the cost of chipsets for AR/VR headsets through specialization, AR/VR headset manufacturing costs will come down and so will market prices. Those lower market prices will then catalyze mass market adoption and set Qualcomm to move higher.

There are a few statistics that support this logic.

First, roughly 45% of consumers consider AR/VR devices too pricey. Second, 46% of those same consumers prefer standalone headsets versus smartphone-dependent alternatives. And third, other technologies have followed a similar price erosion to mass market adoption transition, like personal computers and smartphones.

If this all pans out, there could be a huge pay-off in store for Qualcomm. IDC predicts that the AR/VR headset market will go from less than 10 million units in 2017 to nearly 70 million units in 2022, representing a compounded annual growth rate of over 50%. All together, IDC thinks that roughly 186 million AR/VR headsets will be sold between now and the end of 2022.

But a bet on AR/VR headsets going mainstream is anything but a sure thing.

A 2018 survey of 4,000 game developers, the guys who really know about AR/VR, showed that these “in the know” individuals are less optimistic about AR/VR mass market adoption than IDC.

Only 17% of the respondents see a significant increase in AR/VR headset usage over the next two years, while 30% of respondents don’t think a headset will be in one out of every 10 households until 2021-22, at the earliest. Another 15% don’t think that will happen until 2023-24.

I think the game developers are right on this one. AR/VR headsets are too bulky, too inconvenient and a lack enough use-cases to undergo smartphone or personal computer-like mass market adoption. Instead, AR/VR headsets remind me of 3D printers (bulky, inconvenient, expensive, immobile, and narrow in application).

Qualcomm Stock Looks Overextended Here

Without that big AR/VR catalyst or the NXP Semiconductors NV (NASDAQ:NXPI) acquisition catalyst, Qualcomm stocks looks over-priced here and now.

The company’s long-term model calls for 6-8% revenue growth and 40% operating margins. That includes numbers from NXPI, and also presumably assumes pretty big growth in the AR/VR category. Both of those are wild cards. As such, a more realistic long-term outlook for QCOM is 3-5% revenue growth and 37% operating margins.

Under those assumptions, it is reasonable to assume that QCOM nets around $5 in earnings per share in 5 years. A market-average 16-times forward multiple on $5 implies a four-year forward price target of $80. Discounted back by 10% per year, that equates to a present value in the mid-$50’s.

Bottom Line on QCOM Stock

Qualcomm’s XR chipset is an interesting move. But I don’t expect the long-term financial implications of XR to be that profound. Without that catalyst, Qualcomm stock looks slightly overvalued here and now, and as such, I wouldn’t be surprised to see the stock be weak into the foreseeable future.

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