Qualcomm (NASDAQ:QCOM) stock has traded sideways since July. After surging from around $56 per share in January to $90 per share in May, a U.S. Federal Trade Commission decision pushed shares down to the $65 per share price level. QCOM stock has since traded between $70-$80 per share.
With the stock holding steady, what’s the next move? The rollout of 5G could be a game changer. QCOM doubled its 5G design wins over the past quarter.
But two big risks weigh on the stock. The FTC ruling and U.S.-China trade war could materially impact the company’s stock price. Let’s take a closer look at QCOM stock, and see if there’s an opportunity today.
Recent Developments with Qualcomm
Excluding the $4.7 billion windfall from the company’s settlement with Apple (NASDAQ:AAPL), QCOM’s quarterly revenues fell 13% year-over-year. But it is the potential of 5G, not recent performance, driving the valuation of Qualcomm stock.
InvestorPlace’s Tom Taulli recently broke down Qualcomm’s myriad of advantages with regards to 5G. QCOM clearly has an edge, even as competitors such as Samsung (OTCMKTS:SSNLF) pose a serious threat. But looking beyond the 5G revolution, two key risks impact Qualcomm’s future stock performance.
The first is the FTC anti-trust ruling. As I wrote back in July, the FTC decision could materially harm QCOM’s competitive advantage. A partial stay has paused enforcement of the ruling, but the risk remains. If enforced, Qualcomm would be required to license its intellectual property to rivals. Qualcomm might also have to cease requiring end-users to sign a licensing agreement if they want to buy its chips. This threatens Qualcomm’s high-margin intellectual property licensing cash cow.
Uncertainty over the U.S.-China trade war is the second key risk. As InvestorPlace’s James Brumley discussed on Sept. 20, the trade war has weakened Qualcomm’s working relationship with Huawei. The trade war could also accelerate an economic slowdown, which would impact demand for Qualcomm’s products.
With big potential countered by big risk, valuation may be the factor that decides whether Qualcomm stock is a buy, sell or hold. Let’s take a look at valuation, and see if shares trade at a bargain — or a premium.
A Fair Valuation for QCOM Stock
QCOM stock trades at a forward price-to-earnings ratio of 20.1. The company’s enterprise value/EBITDA for the trailing twelve months is 8.7. It is important to note that trailing earnings before interest, taxes, debt and amortization includes the Apple settlement, and may skew valuation metrics. Excluding the $4.3 billion in operating income from this “other item,” QCOM’s EV/EBITDA is roughly 14.
This EBITDA multiple is in line with chip makers such as Broadcom (NASDAQ:AVGO), which trades at an EBITDA multiple of 14.2. Qualcomm stock trades at a premium to broad-line chip makers such as Intel (NASDAQ:INTC). Intel trades at a forward P/E of 12.4 and an EV/EBITDA of 7.5.
But QCOM is materially cheaper than GPU powerhouses such as Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD). Both trade at higher forward P/E (42.1 for NVDA and 65.5. for AMD) and EV/EBITDA (38.5 for NVDA, 66.6 for AMD) ratios.
This is not an apples-to-apples comparison. These names operate in various segments of the overall semiconductor space. But it does demonstrate how expectations for GPU makers such as NVDA and AMD continue to be inflated. Investors looking for a tech opportunity in chips may find a better play in QCOM’s 5G catalyst.
Qualcomm’s dividend and buyback policy is another positive. QCOM pays a 3.2% dividend. As of June 30, there was approximately $7.8 billion left in the tank for the company’s share repurchase program. Both of these may help support Qualcomm’s stock price.
Bottom Line: Qualcomm Stock Remains a ‘Hold’
After making big moves earlier this year, QCOM stock has tread water. Investors have weighed 5G potential against regulatory and geopolitical risks. Qualcomm continues to have a strong economic moat thanks to its IP assets. But with Huawei pivoting towards Samsung, QCOM may be losing its edge. The FTC’s interest in limiting Qualcomm’s market power is another threat. While the U.S. Department of Justice may rule in Qualcomm’s favor, this key risk remains.
With shares trading at a fair valuation, Qualcomm is neither a bargain nor overvalued. Investors may find opportunity if Qualcomm’s valuation is impacted by short-term headwinds. The upside potential with QCOM is more clear than with other semiconductor opportunities. But the stock does not say to me “screaming buy.” Keep Qualcomm stock on your radar, but wait to buy at a better entry point.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.