Qualcomm (NASDAQ:QCOM) has displayed an uncharacteristic amount of volatility so far this year. While QCOM stock is still up a whopping 32% on the year, the last few months have been filled with highs and lows.
Qualcomm was locked in a legal battle with Apple (NASDAQ:AAPL). It was suddenly resolved with QCOM receiving quite the favorable outcome. They nabbed a one-time payment from Apple of at least $4.5 billion, as well as a six-year global patent licensing agreement.
The deal also nixed all of the legal disputes between the companies, while QCOM management expects to add $2 per share to earnings. This suggests little-to-no discount to QCOM’s licensing fee.
QCOM stock erupted on the news, rallying from $57 to $70 in one day and closing at $82 just a few days later. Qualcomm stock seemed to be on track for $100 per share and a big multi-year run.
So what happened?
FTC vs. Qualcomm Stock
Everything was looking good until the Federal Trade Commission (FTC) made a fuss, accusing Qualcomm of anti-competitive and monopolistic qualities. Judge Lucy Koh ruled that QCOM is a monopoly and must change the way it does business. Essentially the company has to renegotiate its contracts and may be forced to un-bundle some of its offerings.
The FTC also accused QCOM of charging excessive licensing fees for its technology. The company must submit annual compliance reports for the next seven years to the FTC.
Of course Qualcomm is prepared to fight back, but it has created a headache for investors. Will QCOM’s earnings suffer in the years to come? Will the company push back and win an appeal? When it comes to legal fights, it’s hard to pinpoint what will unfold and how it will impact the company’s business going forward.
That of course pumps risk and uncertainty into the stock. We’ve seen Qualcomm stock sink from highs near $90 to lows of $65 earlier this month. Now QCOM is near $75. What do we make of it here?
Valuing QCOM Stock
It’s not just the Apple settlement and the FTC news driving QCOM stock price. The U.S. government’s ban on Huawei has hurt chip makers like Qualcomm, Broadcom (NASDAQ:AVGO), Intel (NASDAQ:INTC) and Micron (NASDAQ:MU). QCOM also faces a fine from the EU, while there is concern about long-term implications on whether Apple buys Intel’s modem business.
All of these situations create risk should a worst-case situation develop, and create opportunity should favorable solutions arise.
Analysts expect 3.3% earnings growth this year to $3.81 per share. However, those estimates increase significantly for fiscal 2020 as analysts expect earnings to grow more than 35% to $5.15 per share. This leaves QCOM stock trading at roughly 19.6 times this year’s earnings and 14.5 times forward earnings.
On the revenue front, estimates call for a 10.2% decline this year to $20.42 billion. In 2020, though, estimates call for a 16.4% rebound to $23.77 billion.
It’s also worth pointing out the company’s dividend yield. Currently Qualcomm shares yields about 3.3%, which is notable in this low-interest rate environment.
Trading QCOM Stock
Click to Enlarge At the end of the day, it boils down to a simple question: Is QCOM stock a buy?
On the daily chart, you’ll notice that QCOM stock is actually putting together a nice uptrend (blue line). This level continues to guide Qualcomm stock higher, as it knocks on that $76 threshold.
Qualcomm has reclaimed its 20-day moving average, but the 50-day moving average was resistant twice in the last month. Near that mark now, it will be interesting to see if QCOM retreats from or reclaims this area.
Worth mentioning is that shares were up about 4% on Wednesday, following news of a progressing trade situation with China and on the back of Micron’s earnings. It helps that MU is finding creative legal ways to work through the Huawei ban too.
Click to Enlarge If you believe the FTC fight won’t notably disrupt QCOM’s business, then the stock is probably a buy. If there are concerns, perhaps investors should wait for a potentially better price. We actually got that perfect opportunity near $64 to $65, shown above on the weekly chart.
Another dip into this region should attract buyers. Assuming there will be no change to this year’s estimates, it will drop QCOM’s valuation to 16.7 times this year’s earnings and just 12.4 times next year’s expectations. It will also boost the yield up to 3.9%.
If this area doesn’t support Qualcomm, a drop back into its prior range is always possible.