Qualcomm (NASDAQ:QCOM) stock has managed to grind higher. Volatile trading in QCOM stock in 2019 has been no surprise: news surrounding the stock has been frequent, and important. Of late, that news has been mostly positive, allowing Qualcomm stock to rise.
But at this point, it certainly looks like the easy money has been made. Valuation still is reasonably attractive, given the company’s growth potential for the next few years.
That said, chip stocks generally don’t get premium valuations, and the risks surrounding QCOM stock seem unlikely to fully abate over that stretch. There are worse plays out there than Qualcomm stock, but at $78, it seems as if there are better ones, too.
A Busy 2019 for QCOM Stock
At the beginning of the year, the big story surrounding Qualcomm stock was its patent battle with Apple (NASDAQ:AAPL). In the background was the U.S.-China trade war, which depending on the day either helped or hurt semiconductor stocks, including QCOM.
Tariffs and bans on sales to Chinese companies like ZTE and Huawei both threatened to wreak havoc on Qualcomm’s business.
The trade war, obviously, has not yet been resolved. Huawei’s status remains up in the air, with chip companies asking the Trump Administration to clear sales to Huawei. Tariffs remain in place.
But the Apple conflict is over. A surprise settlement in April sent QCOM stock soaring. Unfortunately for QCOM stock, it was followed by a negative surprise.
In May, U.S. District Court Judge Lucy Koh ruled in favor of the Federal Trade Commission in an antitrust suit against Qualcomm. As I detailed in July, that case went to the very heart of Qualcomm’s business model.
It seemed to support many of the concerns cited by Apple and echoed arguments made by worldwide regulators who have issued more than $4 billion in fines against the company. Qualcomm stock fell 11% on the ruling.
But QCOM stock has made back those losses. A partial stay from the U.S. Ninth Court of Appeals has been a key factor. As I noted this summer, many legal experts thought Koh’s ruling might be reversed. The appeals ruling, even if it wasn’t a pure win for Qualcomm, adds to that optimism.
And now, at the least the path seems a little clearer for Qualcomm. The M&A speculation that surrounded the takeover effort by Broadcom (NASDAQ:AVGO) and Qualcomm’s bid for NXP Semiconductors (NASDAQ:NXPI) is over. The Apple dispute is settled. U.S. antitrust risk is lessened.
China matters still loom, but they hover over the entire sector. For the first time in at least two years, QCOM stock seems like a normal chip stock. That’s likely driven some of the recent upside – and could drive more going forward.
The Case for Qualcomm Stock
After all, a return to normalcy seems like nothing but good news for Qualcomm stock. The resolution of the Apple lawsuit has brought in billions in back royalties and should restore earnings in fiscal 2020 after a significant hit in recent quarters. 5G demand awaits, with Qualcomm moving into mid-range phones in 2020. Wi-Fi 6 presents another potential catalyst.
Meanwhile, QCOM hardly looks cheap at the moment, trading at 22.5x this year’s consensus EPS, but there’s an attractive 3.15% dividend yield, and the restoration of Apple royalties and 5G suggest strong growth going forward. The Street sees EPS doubling by fiscal 2022, with QCOM stock trading at under 11x that year’s average estimate.
That case is intriguing, particularly since 11x out-year earnings does sound cheap, but I’m not sure it’s all that attractive. 5G is a driver, but it doesn’t necessarily create new revenue. Newer chips should be more profitable and gain higher prices, but Qualcomm still will lose revenue from current-generation products.
Meanwhile, this is a stock that generally traded in the low double-digits in terms of P/E for most of the past few years. Antitrust risk likely will hold; it only takes a minor shift in the FTC (or the Department of Justice, who opposed the current effort). European regulators this summer fined Qualcomm for a second time.
Indeed, the same analysts who on average see $7+ in EPS in fiscal 2022 also see Qualcomm stock as fully valued. The average price target at the moment sits just pennies above the current QCOM stock price. The argument is likely that QCOM, once growth stalls out as 5G sales are fully realized, is going to return to its historical multiples in the 12-13x range.
Even at 15x, a reasonably big figure in the cyclical chip space. Intel (NASDAQ:INTC), for instance, trades at less than 12x 2019 consensus. At that out-year multiple, Qualcomm stock returns about 15% a year (including dividends) as it moves to $110.
That’s a good return, to be sure, but it by no means is a risk-free return. China, antitrust, and competition (including Apple’s purchase of Intel’s failed baseband modem business) all can impact the growth trajectory.
All told, the news here in 2019 unquestionably has been positive. But so has QCOM stock, which has risen 40%. Those gains seem well-earned. But going forward, they will be much tougher to achieve.
As of this writing, Vince Martin has no positions in any securities mentioned.