It’s been an interesting year for Qualcomm (NASDAQ:QCOM), to say the least. A takeover by Qualcomm failed, and so did a takeover of Qualcomm stock. With M&A uncertainty ended, however, QCOM stock has rallied nicely, climbing 44% from April lows. A current price around $70 is just shy of a three-year high.
In a sense, I’m not that surprised by the stock’s move over the past few months. In the middle of the efforts by Broadcom (NASDAQ:AVGO) to take over Qualcomm, I argued that investors who wanted to own a standalone Qualcomm should step to the sidelines and look for an entry point in the $50s.
But I didn’t think a $48 price ever would be on offer, nor did I think QCOM stock would rally so quickly.
And from here, the run to $70 is about as much as investors could have expected six months ago. With Broadcom gone and an end to Qualcomm’s long-running (and I mean long-running) attempt to take out NXP Semiconductors (NASDAQ:NXPI), the market started looking forward to longer-term opportunities.
But the risks that sent QCOM to $50 even before the Broadcom offer persist. And at this point, Qualcomm stock simply isn’t pricing in those risks.
The Rebound in Qualcomm Stock
The rule of thumb generally is that the market doesn’t like uncertainty. And so the fact that QCOM stock has gained over the past few months does make some sense. After all, at the beginning of the year, Qualcomm might have been the most uncertain large-cap tech stock in the market.
Qualcomm was fighting off a hostile takeover from Broadcom. No one knew if that deal would go through, at what price, or how long it would take. Activist firm Elliott Advisors was pushing for a higher price for NXP. A battle raged with Apple (NASDAQ:AAPL) over royalties. Antitrust authorities in Europe and Asia were taking aim at the company.
Much — though not all — of the messiness surrounding QCOM stock has been cleaned up. The Trump Administration essentially put an end to Broadcom’s bid. China took care of the NXP deal (though Qualcomm did have to pay a $2 billion breakup fee).
Investors and analysts seem resigned to a significant loss of revenue from Apple (much of it going to Intel (NASDAQ:INTC)). The company even got some good news on the antitrust front, negotiating an August settlement in Taiwan for just $93 million.
More than any individual development, Qualcomm stock has benefited from the idea that the situation has simply become more clear. That allows analysts to have confidence in their models.
It allows investors and fund managers to understand what type of stock they were buying. (Was QCOM stock in February an arbitrage play? A value stock? An acquirer of NXP? Those distinctions matter under mutual and hedge fund guidelines.)
And so the run does make some sense. At 16x forward earnings, it’s not as if QCOM stock is expensive now. A $5 billion-plus tender offer will boost EPS going forward as well. And investor attention now has turned to the company’s opportunity in 5G along with a helpful 3.5% dividend yield.
Be Careful with QCOM Stock
Still, from here, it looks like most of the good news has been priced in. A 16x forward P/E multiple does sound cheap. But this also is a business whose revenue growth was negative for several quarters until a monster Q2 report in late July.
Smartphone demand — still the key driver here — is likely to be muted on an overall basis. And the loss of sales to Apple remains a near-term issue. Add to that the traditional cyclicality of the chip space — fears of which have hit Micron (NASDAQ:MU) and Nvidia (NASDAQ:NVDA) this week — and it’s tough to argue that Qualcomm stock is cheap, necessarily.
Meanwhile, the stock already has had a huge run. QCOM stock has added about $30 billion in market value since late April. The average Street target price is just $68, below current prices.
5G is a real opportunity. But competition also is rising, and the antitrust concern more broadly isn’t settled. Trade wars between the U.S. and China remain a concern.
Qualcomm isn’t out of the woods. The M&A situation has been clarified, but the battles with Apple, competitors and regulators haven’t been won yet. With QCOM stock near a three-year high, and its sector weakening, it seems likely those risks might return to the narrative some time soon. And that could lead Qualcomm stock to pull back — and potentially pull back big.
As of this writing, Vince Martin has no positions in any securities mentioned.