Before Qualcomm (NASDAQ:QCOM) reached a settlement with Apple (NASDAQ:AAPL) over their long-simmering royalty dispute in mid-April, owners of QCOM stock would likely have been delighted if it hit $70.
However, once the news got out that Qualcomm would get at least $4.5 billion from Apple as part of its settlement, QCOM stock had nowhere to go but up, jumping 59% over 12 days of trading, to a 52-week high of $90.34.
It was at that point that Qualcomm shareholders started to dream about joining the triple-digit club.
And then U.S. District Judge Lucy Koh ruled May 22 that Qualcomm violated antitrust laws by extracting higher patent license fees from smartphone makers. That sent its stock 15% lower over the next five days of trading.
Which begs the question: Is QCOM a $60 stock or an $80 stock?
It’s a $60 Stock
The argument that Qualcomm is a $60 stock begins with a look back at its history.
Since going public in December 1991, Qualcomm has traded above $80 for a reasonable amount of time on just three occasions: December 1999, May 2014 and April 2019.
That’s three times in 25 years.
In contrast, QCOM stock traded below $60 for 11.5 years between May 2000 and January 2012. Between January 2012 and today, it’s spent most of the time trading down to $50 and up to $70, making $60 a common resting place.
While most analysts are positive about Qualcomm’s future, the ruling against the company hurts its future earnings from patent fees and royalties.
“This is a gut punch to Qualcomm and could have a major ripple impact across the smartphone industry,” said Daniel Ives, managing director at Wedbush Securities on May 22. “It could not come at a worse time for Qualcomm going into 5G and its pricing power on chips.”
If the ruling stands on appeal to the U.S. 9th Circuit Court of Appeals, Qualcomm would be required to use component-level licensing, which would reduce the amount it could make off smartphone-makers like Apple.
As a result, while the judge’s decision does little to affect Qualcomm in the near-term, the stock’s long-term attractiveness isn’t nearly as bright.
It’s an $80 Stock
As I said in the previous section, analysts are primarily supportive of QCOM stock. Currently, 26 analysts have a rating on Qualcomm with 16 calling it a “buy” and 10 a “hold”.
As for earnings and price targets, the average analyst has a fiscal 2020 earnings-per-share estimate of $5.26; as for its 12-month price target, the high estimate is $115, the low is $65, and the average is $89, an upside of 27% as of June 7
Based on $5.26 in 2020 earnings, its stock is trading around 13 times those earnings. Over the past five years, Qualcomm’s P/E has averaged 19 — not once has it traded below 15 times earnings over the past decade.
Despite this little setback in the courts, QCOM stock is looking very inexpensive.
That’s especially true when you consider that QCOM stock is currently yielding 3.5%, generating more than $3 billion in free cash flow and debt is a reasonable 18% of its market cap.
The Verdict on QCOM Stock
If you take Qualcomm’s trailing 12-month free cash flow of $2.1 billion and enterprise value of $91.8 billion, you get a free cash flow yield of 3.3%. By comparison, Apple’s current free cash flow yield is 6.5%, with a dividend yield of 1.6%.
For income investors, settling for Apple and half the yield might be too hard to swallow.
Also, Qualcomm supplies 50% of the global smartphone market. An investment in QCOM means you’ve got a good shot of winning no matter who the dominant smartphone player is. However, with Apple, you’ve got to hope that it retains its lead to keep winning.
For this reason, I believe that QCOM is an $80 stock despite faltering on several occasions over the past five years.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.