Qualcomm (NASDAQ:QCOM) stock is not looking so hot anymore for at least two reasons.
Semiconductor stocks have succumbed to selling pressure on renewed U.S./China trading tensions. Meanwhile, QCOM’s third-quarter earnings report, posted on July 31, included weaker than-expected guidance that scared investors.
Has QCOM stock fallen enough to interest investors who are looking for an inexpensive chip stock?
President Trump’s threat, made last Thursday, to impose an additional “small” 10% tariff on Chinese imports sent chip stocks sharply lower.
Last week, the Nasdaq (NASDAQ:QQQ) fell 4.1%, its worst weekly performance in 2019, and the SPDR S&P Semiconductor ETF (NYSE:XSD) fell 3.9%. Chances are good that the technology sector will underperform if selling pressure on the stock market accelerates in the week ahead.
QCOM Stock Slips After QCOM’s Q3 Results
Qualcomm reported EPS of 80 cents in Q3, beating average estimates by 3 cents. Its revenue fell 12.7% year-over-year to $4.89 billion.
For Q4, the company forecast revenue in the range of $4.3 billion – $5.1 billion, below the $5.71 billion that it had previously predicted. It provided Q4 EPS guidance of 65 cents to 75 cents, below the average estimate of $1.10.
Much of the sharply lowered outlook was due to the exclusion from the guidance of a supply deal with controversial Chinese firm Huawei. Quite possibly, Qualcomm was close to negotiating a deal with Huawei until trade relations between the U.S. and China worsened last week.
If the two countries reach a deal that allows QCOM to sell its chips to Huawei, Qualcomm stock could bounce back. But of course, ongoing tariff risks and a resumption of the ban on American firms doing business with Huawei would hurt QCOM stock.
QCOM’s Growth Opportunity
QCOM reported strong Q3 results, even though its sales of products for 4G devices was weak.
That’s partly because it is beginning to sell products for 5G. The global transition to 5G will cause Qualcomm’s growth to accelerate in the next few years. Already, its 5G design wins in the last three months have doubled. In 2020, QCOM will be well-positioned to benefit from ramping 5G sales. Those sales should provide QCOM stock with a positive catalyst.
In the near-term, however, expect an underwhelming performance by Qualcomm stock, as its Q4 outlook suggests. In 2019, weak demand from China will continue to weigh on Qualcomm’s results.
But next year, the growth of Huawei’s market share outside of China, plus purchases by Chinese companies ahead of the proliferation of 5G, will be positive catalysts for QCOM stock.
The company’s shorter-term outlook in China is especially weak. Its device shipments to the Asian country fell only 5%, but the sales of devices with Qualcomm’s chips there sank around 20% YoY.
Consumers are delaying upgrades due to the uncertain macro environment, and they are waiting for the launch of 5G devices. Though device sales will be weak for the next two quarters, the launch of 5G devices may get consumers in the mood to upgrade.
Qualcomm believes the worldwide rollout of 5G will start in early 2020. Its revenue from each 5G device may be as much as 50% higher than its revenue from comparable 4G devices,
On its conference call, the company said:
what we’re seeing to some (may be) counterintuitive, but (we are) building confidence on the 5G transition as we had some of the OEMs cancel some of the 4G launches and move their portfolio towards 5G designs… We see preparing for the 5G ramp at the next selling season.
As suppliers draw down their 4G inventories, the ramp up to 5G will lead to more orders for Qualcomm.
Valuation and Your Takeaway
20 analysts covering Qualcomm stock have an average price target of about $79 on QCOM stock which is only 16% above QCOM’s recent price of $68.
But QCOM stock has clear headwinds ahead that may not disappear soon enough. The biggest unknown is the transition from 4G to 5G.
But Qualcomm will most certainly benefit from the launches of 5G handsets. For the owners of Qualcomm stock, this is a waiting game and a chance to buy QCOM if it dips further.
As of this writing, the author did not hold a position in any of the aforementioned securities.