Shares of global chip giant Qualcomm (NASDAQ:QCOM) have been on a wild roller coaster ride in 2019. In short, due to a mix of upside and downside catalysts, QCOM stock has registered as both a strong buy and sell.
Through it all, Qualcomm stock is up nearly 30% year-to-date versus an 18% gain for the S&P 500. In other words, the good old “buy-and-hold” strategy has worked out pretty well so far despite the volatility.
It should continue to work for the foreseeable future. Tons of geopolitical and legislative risks will keep QCOM stock from rallying back to its 2019 highs. But at current levels, those risks are fully priced into the stock. What’s not priced in is profit upside from the Apple (NASDAQ:AAPL) settlement. That could really drive shares, especially from currently depressed levels.
The investment implication? Buy and hold. The ride may be volatile, but Qualcomm stock should trend towards $80 by the end of the year. That implies another roughly 15% upside from here or nearly 20% total return after you include the yield. That’s good enough return potential to warrant buying here and holding through the noise.
Why Qualcomm Stock Won’t Make It Back to $90
Shortly after its landmark settlement with Apple, Qualcomm stock went parabolic, growing from $60 to $90 over a two-week period. But a negative FTC ruling short-circuited that rally. The watchdog agency essentially stated that Qualcomm’s and Apple’s squabble — Qualcomm charging unreasonably high royalties for its patents — was indeed Qualcomm’s fault. That is, the FTC ruled that Qualcomm’s licensing agreements violated U.S. antitrust law, thus requiring renegotiation.
QCOM stock dropped from $90 to below $70 on that ruling, with good reason. True, Qualcomm’s licensing business accounts for only 20% to 35% of total revenues. But it’s a 70% to 80% margin business, whereas the rest of Qualcomm represents only 10% to 20% margins. Thus, roughly 50% to 75% of Qualcomm’s profits come from licensing endeavors. The areas requiring renegotiation impact the company’s core profit drivers.
That’s no good. Renegotiation of those agreements will result in less-favorable terms for Qualcomm, which will result in lower revenues across the whole licensing business. That would incur a big hit on Qualcomm’s overall profits.
Further complicating the situation here, the semiconductor industry continues to be at the epicenter of the U.S.-China trade war. That conflict is diluting global semi demand at a time when demand is already naturally cooling after several years of red-hot growth. Thus, global demand is suffering from a double hit in 2019. Unfortunately, that double hit means Qualcomm stock likely won’t have enough fundamental firepower to offset lower licensing revenues and profits.
Why Qualcomm Stock Will Rebound to $80
The bull thesis on Qualcomm stock at $70 is pretty simple. Sure, there are headwinds here which will ultimately keep shares from reclaiming its 2019 highs. But there’s also one huge upside catalyst — renewed Apple revenue — which isn’t priced in at $70. As that catalyst produces strong profit growth over the next several quarters, QCOM stock will also benefit from multiple expansion.
This bull case is centered around two things: valuation and growth. The current valuation on QCOM stock seems stretched at 19-times forward earnings. But that multiple likely moves higher on increased revenues and profits in 2020 and 2021. Apple will regain its sales mojo right at the same time as it launches its 5G-armed phone. Concurrently, global semi demand should firm up after a down 2019, and trade tensions should move into the rear-view mirror.
Indeed, analysts project Qualcomm’s earnings per share to increase nearly 40% in 2020 to over $5. EPS is projected to rise another 35%-plus to nearly $7 by the following year.
Normally, QCOM stock trades around 13-times forward earnings. A historically normal 13-times forward multiple on fiscal 2021 projected EPS of $7 implies a 2020 price target of $91. Discounted back by 10%, that implies a 2019 price target of just over $80. Thus, if you consider the robust profit-growth potential of Qualcomm over the next several years thanks to renewed Apple revenue, prices above $80 make sense by the end of 2019.
Bottom Line on QCOM Stock
At $70, Qualcomm stock fully prices in geopolitical and legislative headwinds, but does not fully account for Apple-related tailwinds. This discrepancy creates an opportunity for investors.
Over the next several months, geopolitical and legislative headwinds will moderate. The Apple tailwind will gain momentum. This dynamic of moderating headwinds and accelerating tailwinds will improve investor sentiment, and ultimately push QCOM stock higher.
As of this writing, Luke Lango was long QCOM and AAPL.
