Qualcomm (NASDAQ:QCOM) stock continues to be a roller coaster. Less than three months ago, QCOM stock reached its highest levels in almost four years. Since then, QCOM stock has dropped 28% and is now threatening to broach its multi-year support near $50.
There’s a case to be made for buying the dip here. Qualcomm’s long-running dispute with Apple (NASDAQ:AAPL) is negatively impacting its near-term results. QCOM’s loss of iPhone revenue at least in part caused the disappointing fiscal first-quarter revenue guidance that helped tank QCOM stock earlier this week. But at some point, in some way, that dispute will be resolved. 5G provides a longer-term catalyst for QCOM stock. And trading at 11 times its consensus forward EPS estimate, and carrying a dividend yield of 4.5%, Qualcomm stock is cheap.
All that said, Qualcomm stock probably should be cheap. Chip stocks have come down across the board, and investors historically haven’t paid much for chip makers with limited growth. Indeed, Intel (NASDAQ:INTC) stock, trading at around 10.5 times its consensus forward earnings is even cheaper. QCOM stock can grind higher, but particularly after the recent market selloff, there are other names that look more attractive.
All told, $55 looks to be a roughly correct price for QCOM stock. The issue for Qualcomm stock isn’t that it’s fallen too far; instead, its problem is that it rose too high in the first place.
The Bearish View on QCOM Stock
I’ve been skeptical about QCOM since early last year, and I haven’t seen much lately to change my mind. The company’s adjusted operating income dropped 20% in fiscal 2018, and the licensing disputes with Apple and China’s Huawei were not entirely responsible for its weak bottom line. Smartphone demand is muted at best, as shown by the recent, sharp decline of Apple stock.
The semiconductor business is difficult, as investors are seeing at the moment. And there’s still the question as to whether antitrust authorities – who have taken aim at Qualcomm in the past – might do so again.
Meanwhile, QCOM stock has tremendous exposure to smartphones. Qualcomm’s meaningful exposure to both smartphones and regulators should make investors cautious about QCOM stock, as QCOM still faces risks from licensing disputes and potential regulatory actions.
And I’m not sure, at this point, what Qualcomm can do to change its growth trajectory. Its attempted acquisition of NXP Semiconductors (NASDAQ:NXPI) fell through. After Broadcom (NASDAQ:AVGO) tried and failed to buy QCOM, Qualcomm probably won’t be able to sell itself.
QCOM stock pretty much”is what it is” – and QCOM honestly does not have a hugely attractive business or a hugely attractive stock. The business has downside risk, and Qualcomm stock has fallen below its early 2011 levels. Low-growth tech stocks don’t get a lot of love from investors, so QCOM probably will continue to be lackluster going forward, at best.
The Bull Case for Qualcomm Stock Isn’t Strong Enough
All that said, QCOM stock probably isn’t the worst investment in the market. After the recent selloff, I’d rather take a swing at Micron Technology (NASDAQ:MU) or even Nvidia (NASDAQ:NVDA), but one could argue that Qualcomm’s valuation is attractive. The dividend of QCOM stock yields 4%+, and Qualcomm is aggressively buying back its stock. Even if Qualcomm doesn’t grow at all, QCOM stock will probably provide a positive return, if not a spectacular one, over the longer term.
5G could help jump-start Qualcomm’s revenue growth, and any resolution of Qualcomm’s dispute with Apple would at least reduce Qualcomm’s risk, likely causing Qualcomm stock to rise. Indeed, it looks like the end of the NXP and Broadcom sagas helped boost QCOM stock this summer. Moreover, QCOM is still throwing off cash and still leads in key areas.
Still, I’m honestly not sure what convincing argument the bulls can make about Qualcomm stock. Yes, it’s cheap, but it’s not extremely cheap, given the company’s recent growth. It has a nice dividend, but investors have learned, even in this bull market, that dividends do not protect stock prices. It’s a leader in some markets, but those markets aren’t growing. That makes it exceedingly difficult for Qualcomm to beat expectations and prevents QCOM from rallying.
So the current valuation of QCOM is about right. The shares are cheap, but the market appears to realize that they should be cheap.
As of this writing, Vince Martin has no positions in any securities mentioned.