Shares of mobile chip giant Qualcomm (NASDAQ:QCOM) have done well in 2019. So far this year, QCOM stock is up more than 38%, and it’s only September. Even if Qualcomm stock was to trade sideways into the end of the year and finish 2019 up 35%, it will still have been the best year for QCOM stock since 2004.
In other words, Qualcomm stock is hotter in 2019 than it’s been in 15 years. Naturally, when a stock is this hot, investors wonder whether the strong performance can continue.
I believe there are three main reasons why QCOM stock can continue to trend higher.
First, the fundamentals underlying QCOM stock remain favorable and imply that the shares could exceed $90 within the next 12 months. Second, the outlook of QCOM stock is improving and should provide sufficient fuel to push the stock towards $90. Third, the technicals of Qualcomm stock imply that QCOM is in the first few innings of a multi-quarter uptrend.
All told, I think the huge 2019 rally of Qualcomm stock will extend into 2020 and potentially even beyond that. As a result, I will remain bullish on QCOM stock for the foreseeable future.
The Fundamentals of Qualcomm Stock Are Strong
The first reason the rally of Qualcomm stock will continue is that the company’s fundamentals suggest that the shares should continue to climb.
QCOM stock has multiple, positive catalysts. Trade-war tensions are easing. With trade-war tensions falling, the global economy is starting to pick up some steam again. There’s also a great deal of fiscal stimulus on the way from the ECB and U.S. Federal Reserve. All of those trends should lift the global semiconductor market.
With respect to Qualcomm in particular, the company looks poised to win big over the next few years for two major reasons. First, Apple (NASDAQ:AAPL) is QCOM’s customer again, meaning the chip maker will again obtain revenue from iPhone sales.
Secondly, every smartphone will be 5G-capable, and that will provide a huge lift for Qualcomm’s sales and profits, since Qualcomm is the leading global supplier of 5G chips.
At the same time, Qualcomm’s biggest risk – legislation which may force it to make its licensing contracts with smartphone companies less favorable – has been put on hold.
Sure, QCOM stock appears to already reflect all this good stuff. The stock does trade at nearly 23-times its forward earnings, versus the semiconductor sector’s average forward earnings multiple of about 15.
But over the next few years, QCOM should grow rapidly. According to YCharts, its revenues are expected to rise 15% next year and 20% the year after that, while its EBITDA margin is poised to climb about five percentage points over the next two years. Its earnings per share, meanwhile, is expected to jump 24% next year, and 40% the year after that to roughly $6.
If QCOM’s EPS reaches $6 in fiscal 2021 and its price-earnings multiple is 25, which is average for semiconductor stocks, QCOM stock price would be $90.
The Outlook Is Improving
The second main reason that the rally of Qualcomm stock will probably continue is that its improving outlook will drive QCOM stock towards $90 over the next few quarters.
For the longest time, Qualcomm stock did nothing. Now it’s having its best year in 15 years. From a psychological standpoint, that’s meaningful. This large, powerful company didn’t grow much for a long time because of the stagnation of the smartphone market and its disputes with Apple.
Now the smartphone market is set for meaningful growth again, thanks to the launch of 5G, while QCOM’s legal disputes with Apple are over. So the two things which have kept QCOM stock stuck in neutral for the past few years are in the rear-view mirror.
Investors should want to continue to buy QCOM stock to benefit from its improved outlook. A stock that went nowhere for several years is now breaking out ahead of what should be the company’s best two years in recent memory. That’s compelling.
The Technicals of QCOM Show a New Uptrend
The third main reason that the rally of Qualcomm stock will continue is because its technicals look different this time, compared to those of its prior, short-lived rallies over the past five years.
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Specifically, in each of Qualcomm’s rallies over the past five years, the 50-day moving average broke above the 200-day moving average. But, within a few months of that golden-cross formation, the 50-day moving average started sloping downward.
That dynamic isn’t playing out this time around.
A few months ago, the 50-day moving average of Qualcomm stock broke above its 200-day moving average. As of yesterday, the 50-day moving average was continuing to slope upward. That’s substantial from a technical perspective. It means that this breakout of QCOM stock may be the real deal and not just a head fake like its prior rallies.
The Bottom Line on QCOM Stock
I’ve liked Qualcomm stock for most of 2019, and continue to like it now. The fundamentals, outlook, and technicals are all giving “buy” signs, and when that happens, what comes next is usually more gains.
QCOM stock shouldn’t be an exception to this pattern. I fully expect its favorable fundamentals, outlook, and technicals to keep QCOM stock in rally mode for the foreseeable future.
As of this writing, Luke Lango was long QCOM.