That seems like an odd headline, doesn’t it? How could a spat with Apple (NASDAQ:AAPL) actually be a good thing for Qualcomm (NASDAQ:QCOM)? Well, it’s not really good for Qualcomm per se, acting as a driving force in knocking Qualcomm stock down from the mid-$70s down to the mid-$50s. But it is a good thing for investors who are looking to buy.
Down near these levels, Qualcomm has an even lower valuation and is able to buy back more stock (more on that in a minute). While legal disputes always run the risk of going against a company like Qualcomm, it’s clear Apple still owes it money. QCOM says that figure is $7 billion in royalties.
A battle with Apple is, well, undesirable. With billions on the line, it will surely drag out for quite some time. That kind of uncertainty is no friend of any investor. However, it does act as an anchor on the stock, and for those with a long-term outlook, that can be a great catalyst for accumulating a position.
The question is, should they?
Evaluating Qualcomm Stock
In September, all seemed to be going just fine, with shares trading near $75. The company was coming off a top- and bottom-line earnings beat in July and announced that, after failing to gain approval for its takeover of NXP Semiconductor (NASDAQ:NXPI), it would begin an accelerated buyback program worth $30 billion.
Since then though, Qualcomm has been no exception to the decline in the stock market. Shares have been smacked lower, recently changing hands in the mid-$50s. Last quarter’s earnings report didn’t help matters. QCOM beat on earnings and revenue expectations, but gave very poor guidance for the current quarter. Management expects revenue of $4.5 billion to $5.3 billion, well below consensus estimates of nearly $5.6 billion.
So far, Qualcomm has executed about two-thirds of its buyback, with roughly $9 billion left. That’s good for more than 13% of the outstanding stock based on current prices.
The Apple battle is inflicting pain and it’s clear by those results. That said, Qualcomm’s business is not pinned exclusively to Apple. In fact, far from it. The company still supplies plenty of chips for plenty of other devices. Further, the 5G rollout will be a big win for Qualcomm stock.
The situation with Apple is far from ideal. That being said, QCOM will likely get what it’s owed and its financials will see better days as we move forward. Shares trade at less than 15 times this year’s earnings estimates and less than 13 times next year’s. What’s more, Qualcomm stock pays a 4.5% dividend yield. And don’t forget, the U.S. and China have agreed to a temporary cease-fire in their trade war, which can only help.
At $75 a share, it’s a different story. But in the mid-$50s — more than 25% off its highs — and yielding 4.5%, it’s not a horrible risk/reward.
Trading QCOM Stock
I view the fundamentals as a “good not great” situation until some of its unknown legal outcomes are figured out. That said, the valuation is reasonable, cash flows will be fine and the dividend yield is attractive. Those who can wait will likely be rewarded.
Those who can’t may find Qualcomm stock as an attractive trade candidate.
Wednesday’s big market rally set the tone for a strong reversal in QCOM stock. Shares are now coming up on the 21-day moving average, which may act as short-term resistance. A move over this level (as well as downtrend resistance in purple) should excite the bulls. Over this area and a return back to the $61 to $62 area seems plausible.
However, I like Qualcomm stock with its support between $53 and $55. This area has been significant over the last year and should continue to buoy the share price. Below it though, and the lows near $48 are on the table.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL and NXPI.
