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Qualcomm Stock May Face Short-Term Volatility in Early Q4

Over the past 12 months, shares of Qualcomm (NASDAQ:QCOM), the leading chipmaker, are up about 2%. As we get ready to end the third quarter of the year, long-term shareholders are wondering what they can expect from QCOM stock.

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Thanks to its diversified revenue stream and the strength of its technological offering, I believe that Qualcomm shares belong in a long-term growth portfolio. However, there might be some short-term price weakness, especially ahead of the group’s upcoming quarterly earnings announcement, expected on Nov. 6.

Investors could regard any drop of QCOM stock as an opportunity to go long the shares.

How Qualcomm Stock Makes Money

Qualcomm is the largest maker of chips for smartphones and wireless modems. Its chipsets account for about two-thirds of its total revenue.

QCOM stock’s second-highest source of revenue is mobile-phone royalties and licensing. Its patent-licensing division collects royalties from 3G and 4G technologies that the chip giant helped invent. Its portfolio of wireless patents is the largest globally.

These royalties have been Qualcomm’s competitive advantage over the years. In fact, while QCOM stock gets most of its revenue by selling mobile chipsets, most of its profits come from these wireless patents. In other words, Qualcomm’s higher-margin licensing unit has traditionally supported the growth of its lower-margin chipmaking business.

Other companies, including many tech giants such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Samsung Electronics (OTCMKTS:SSNLF), that manufacture or use chips, need to obtain a license from QCOM. And the owners of QCOM stock benefit from the continued reliance of these companies on Qualcomm’s intellectual property.

However, until Qualcomm’s recent settlement with Apple, QCOM could not benefit from these royalties fully. So the tide has finally changed in favor of QCOM stock. Shareholders may now look forward to the company concentrating on its business activities, rather than get dragged by legal disputes.

On July 31, the company reported its fiscal third-quarter results. Its earnings came in at 80 cents per share.

However, QCOM stock’s revenue was $4.89 billion vs $5.08 billion expected. As global smartphone sales have declined, revenue growth has dried up.

Despite the revenue miss, Qualcomm stock has a strong balance sheet. At the end of the Q3 of fiscal 2019, Qualcomm’s cash and cash equivalents and marketable securities totaled $14.4 billion.

During the conference call, CEO Steve Mollenkopf highlighted that the adverse industry conditions, particularly in China, would likely affect business conditions for the next two fiscal quarters.

Qualcomm Stock and the 5G Revolution

Wall Street believes that Qualcomm will play a dominant and early role in 5G, replicating its success with 3G and 4G mobile networks. If analysts are correct, QCOM stock is a good pick for long-term investors. The company is likely to provide a significant part of the intellectual property that will be used to develop 5G communications standards.

Meanwhile, the recent agreement between QCOM and AAPL will enable the two giants to work together. Prior to the agreement, Wall Street was expecting Apple to collaborate more closely with Intel (NASDAQ:INTC), QCOM’s main rival in the chip space. Intel might indeed have lost the most from the QCOM-APPL settlement.

5G, which will boost productivity and growth, is currently being rolled out commercially in the U.S. Many of our readers are familiar with the expected benefits and the range of applications of 5G.

For example, the new technology will be at the center of the infrastructure that will be used to develop smart cities. This new cellular standard will also lower the lag or latency of mobile applications, which should have a positive impact on the development of online gaming as well as self-driving cars.

Manufacturers have announced that they will be releasing 5G smartphones soon. In the past few months, Qualcomm has demonstrated how its mobile chips will interface with these phones.

QCOM stock currently trades at a forward P/E of 17.67, which many investors may regard as an acceptable ratio for a tech giant. In comparison, forward P/E ratios of Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA), and Texas Instruments (NASDAQ:TXN) are 27.7, 24.3, and 21.6 respectively.

Where QCOM Stock Price Is Now

Year-to-date, QCOM shares are up about 32%. Since late May, QCOM shares have gained about 15%.

On May 29, Qualcomm stock saw a low of $64,76. On Sep. 5, QCOM shares hit a recent high of $80.44.

Now they are hovering around $75.

As we approach the last quarter of the year, investors are wondering if QCOM stock may be able to reach its 52-week high of $90.34, which it had seen on May 2.

As a result of the recent impressive run-up of QCOM stock in the past several weeks, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that QCOM stock has become “overbought.”

Therefore, as we approach another important earnings season, QCOM stock might be weak in the short-term. Furthermore, if the industry weakens or the stock market becomes wobbly due to political or trade developments, then Qualcomm stock may also be adversely affected.

The 3.1% dividend yield of QCOM stock and the group’s generous stock repurchase program are likely to act as support in case QCOM stock declines further in the coming weeks. It would be important to remember that Qualcomm has regularly increased its dividend in the past. Therefore, investors who also pay attention to creating a passive income stream could regard any potential drop in the share price as an opportunity to buy into QCOM stock.

The Bottom Line on Qualcomm Stock

On the 5G front, Qualcomm is likely to be a leader, propelling its earnings growth. However, I would not advocate bottom picking if QCOM weakens in the near-term case. Yet, I find QCOM stock to be a compelling buy candidate, especially between $65 and $70. And in two to three years, I’d expect QCOM stock to surge to $95-$100.

As of this writing, Tezcan Gecgil holds covered calls in QCOM (September 27 expiry) and INTC (October 4 expiry) stocks.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/qualcomm-stock-may-face-short-term-volatility-in-early-q4/.

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