Qualcomm (NASDAQ:QCOM), which makes chips used in smartphones, is having a fabulous year in the markets, as QCOM stock is up 33% in 2019. If you happened to be living on a desolate island the past few years and came upon QCOM stock for the first time, you would be impressed by its performance.
The reality is much different.
If you bought QCOM stock around this time five years ago, you would have an annualized total return of just 1.5%, considerably worse than the performance of the S&P 500. Talk about a Jekyll-and-Hyde stock.
Investors shouldn’t own QCOM stock if they’re afraid of a little volatility. However, I believe investors can make a lot of money on Qualcomm stock over the long-term. Here’s why.
What’s QCOM Stock Worth?
My last article about Qualcomm stock was in mid-June, when the shares were trading around $70, I wondered then if QCOM was a $60 or $80 stock.
On the one hand, QCOM managed to take on Apple (NASDAQ:AAPL) in court and extracted a financial settlement from the smartphone maker while continuing to supply Apple with 5G technology.
What’s not to like about that?
Only weeks later, a U.S. judge ruled that QCOM must change its practices, a decision that could force Qualcomm to renegotiate many of its technology licensing agreements. The verdict will likely seriously reduce QCOM’s profits in the future.
“On July 3, the courts once again ruled against Qualcomm. The company must re-negotiate agreements with customers (including LG) based on fair, reasonable and non-discriminatory terms (FRAND) while it waits for its appeal to be heard,” stated InvestorPlace tech guru Brad Moon in an article published on July 5. “Doing so will gut QCOM’s revenue and hammer its profits. The company complained the resulting agreements would “upend” the smartphone industry and hurt it for years to come even if it wins its appeal — which is expected to take a year or more to wind through the courts.”
Brad knows a lot more than I’ll ever know about technology. The fact that he’s gone negative on QCOM stock is worth noting.
In my last article, I concluded that QCOM stock was an $80 stock because it generates significant free cash flow, has little debt, and had a very healthy dividend yield of 3.5%.
After rising about $6 over the past month, QCOM now yields 3.3%, which is still pretty darn good for a tech company.
How to Make Money on QCOM Stock
During the past five years, QCOM has shown that it’s often down, but never out.
Since the previous flirtation of Qualcomm stock with $80 in April 2014, QCOM stock’ has traded at or below $50 on four different occasions: November 2015, September 2017, April 2018, and January 2019.
Anyone who bought 100 shares of Qualcomm stock for $80 in April 2014 and then 100 shares every time it dropped below $50 today would have 500 shares of QCOM stock worth $37,635, equating to a 34% cumulative return over those five years, not including dividends. With dividends, the annual total return would have been 8%-9%.
I’ll admit this is a back-of-the-napkin calculation done in hindsight, while future returns aren’t predicated on past results. It’s possible that QCOM stock will never revisit $50, but go straight to $100 and beyond.
But who cares?
Investors who buy QCOM stock today because they believe in its stranglehold on the smartphone market and see the shares go straight to $100 will obviously make money on their investment.
However, if QCOM falls to $50, and they buy more shares, as Warren Buffett would do, their long-term returns will be enhanced.
History has shown QCOM to be a very volatile stock. Investors should take advantage of that volatility.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
