The Qualcomm (NASDAQ:QCOM) roller coaster continues. Qualcomm stock has mostly traded sideways for much of this decade — but with quite a bit of volatility. Even by those standards, however, the last two months for QCOM stock have been something to see.
On April 15, Qualcomm stock closed below $58. Investors were worried about the company’s exposure to its slowing semiconductor segment, regulatory inquiries, and a high-stakes legal battle with Apple (NASDAQ:AAPL). The next day, Qualcomm announced a favorable settlement, surprising investors. That drove QCOM stock up 23% and beyond. It would touch $90 in early May — a cool 55% gain.
Since then, however, QCOM has fallen by nearly 30%. Trade war concerns have hit the stock and the semiconductor space more broadly. A negative FTC ruling added pressure last month, and again last week.
The sell-off might seem overdone. As I wrote recently, Wall Street seems to think so, with a consensus price target of $96. And I see the case. But any investor looking to time the bottom here — with QCOM stock in the $68 range — needs to realize that all for the noise surrounding the Apple relationship, there are many other risks lurking. Some already are playing out — and some may be yet to come.
Chip Sector Problems
One clear risk is that Qualcomm stock is going to be exposed to general sentiment toward semiconductor stocks. That sentiment has turned negative of late — one reason why QCOM stock has tumbled — and seems unlikely to get much better soon.
Indeed, cautious guidance from Broadcom (NASDAQ:AVGO) after Q2 earnings on Thursday seems likely to only add to the pessimism. AVGO stock fell more than 7% in after-hours trading and QCOM stock dropped 1.8%. Broadcom’s broad reach gives its management credibility in judging the outlook for much of the semiconductor industry. Its guidance undercuts the predictions of a second-half rebound made by Nvidia (NASDAQ:NVDA), Intel (NASDAQ:INTC) and other chip leaders.
That might seem a short-term problem. But it also means QCOM, in the context of the sector, isn’t quite as cheap as it used to be. A 13x forward P/E multiple sounds inexpensive — but INTC is at 10.3x. Even NVDA is at 21x, with better end markets for growth in datacenter and gaming. QCOM not that long ago was one of the cheapest chip stocks out there and that’s simply not the case anymore.
Is Apple Done?
As my InvestorPlace colleague Dana Blankenhorn detailed last month, at least part of Apple’s willingness to sell came from Intel’s inability to deliver a baseband modem of its own. With nowhere else to go, Apple was forced to pony up.
But how long will Apple be willing to sit quietly? Already, rumors are swirling that Apple is going to buy Intel’s modem business, presumably as a first step toward bringing development in-house. Whether Apple makes that move or not, it’s not going to sit idly by forever under Qualcomm’s terms.
The settlement does put cash into Qualcomm’s coffers and likely will boost near-term earnings. But a legal settlement doesn’t mean that the broader battle between Apple and Qualcomm is over.
Are Regulators Done?
Meanwhile, the charges that Apple raised — that Qualcomm essentially is abusing its monopoly power — seem to have caught the attention of regulators. Again.
The FTC’s move isn’t coming in a vacuum. Antitrust authorities in South Korea and Europe already have fined the company. Qualcomm continues to insist that only some of its patents are subject to “FRAND” (fair, reasonable and non-discriminatory) terms.
Apple’s lawsuit at the least may have raised further questions about Qualcomm’s case on that front. And the FTC may not be the only regulatory agency listening.
The Smartphone Problem for QCOM Stock
But the broadest issue here is that Qualcomm still is largely a smartphone play. That’s a market that in terms of units, is basically zero-growth, a key reason why QCOM stock has stalled out for years now.
To be fair, the conversion to 5G does present an opportunity for Qualcomm stock. But it’s not necessarily an organic opportunity: 5G sales to at least some extent will cannibalize 4G units.
There’s a reason why QCOM stock struggled even before the Apple issues. It’s not as if investors — or analysts — were unaware 5G was on the way. Yet with Qualcomm earnings actually declining over that period, 5G growth wasn’t enough to get excited. With all the risks here, that may again be the case.
Qualcomm Stock Might Be Cheap But Be Careful
To be sure, the risks are priced in to at least some extent. Earnings are going to grow nicely in 2020 and 2021, with some help from Apple. The Street remains behind the stock and 5G will be a tailwind as well.
But that’s true for a lot of chip plays — and those other semiconductor stocks don’t have some of the same major risks. Qualcomm stock may have a path to bouncing back but it will have to dodge more than a few obstacles to do so.
As of this writing, Vince Martin has no positions in any securities mentioned.