It’s been quite a ride for Qualcomm (NASDAQ:QCOM) stock in recent years. After having traded mostly between $50 and $70 from 2013 to 2018, QCOM stock has traded in a wider range so far in 2019. Qualcomm stock dipped below $50 in late January. By early May, it was at $90. A retreat to $65 has been followed by a bounce to its current price of $80.
There have been fundamental reasons for the wild trading. A battle with Apple (NASDAQ:AAPL) weighed on QCOM stock. The resolution of that dispute led to huge gains.
Meanwhile, the U.S. ban on QCOM’s Chinese customer, Huawei, impacted the company’s fiscal Q3 results in late July. Antitrust regulators continue to probe the company. The overall trade war and fears about slowing smartphone unit growth have affected Qualcomm stock as well.
Ahead of the company’s fiscal fourth quarter report next Wednesday, it does appear as if QCOM stock has returned to some level of normalcy.
It’s true that U.S.-China relations remain frigid and antitrust risks still loom. But investors’ focus has returned to the long-term opportunity for QCOM in 5G. And strong quarterly reports by Intel (NASDAQ:INTC) and Lam Research (NASDAQ:LRCX) have boosted optimism toward the industry — and pushed QCOM stock higher.
That said, the risks I discussed above are still in play. And Qualcomm stock isn’t cheap. As a result, weaker than expected Q4 earnings or a Q1 guidance miss could hurt QCOM stock. And Qualcomm stock could also drop if investors become less upbeat about the sector.
Why the Numbers May Not Matter
Issues related to Huawei and some residual impact from the company’s royalties from Apple will impact QCOM’s Q4 results. Analysts, on average, expect a 22% year-over-year reduction in earnings per share and a 19%-plus YoY decline in revenue.
Qualcomm’s business isn’t generally declining. Rather, its business still hasn’t overcome all of the likely temporary challenges it’s been facing. And that’s a key reason to be bullish on QCOM stock.
It’s also a key reason for the relatively high valuation of Qualcomm stock. Assuming the average Street EPS estimate for Q4 is roughly correct, QCOM stock trades for about 23 times this year’s earnings. That’s an enormous expansion from its price-earnings multiples that generally have held in the 11-15 range for most of the past few years.
But QCOM’s business should get back to “normal” in coming years. That, in turn, should drive big bottom-line growth for QCOM. Indeed, analysts, on average, expect QCOM’s EPS to roughly double by fiscal 2022. In the meantime, however, its Q4 numbers aren’t really going to reflect the potential of its underlying business.
What Will Drive QCOM Stock After Earnings
That doesn’t mean QCOM stock can’t move after the report. Indeed, the options market is pricing in a greater than 5% move between now and next Friday.
But it’s unlikely that the headline numbers are going to drive much volatility. Rather, the focus will be on its guidance and post-earnings commentary.
That guidance likely won’t be spectacular — but that’s not necessarily fatal to the bull case for Qualcomm stock. It isn’t going to suddenly begin growing next quarter, either. Still, a solid outlook might spark some buying of QCOM stock as investors start pricing in a return to past earnings levels.
The specific Q1 outlook aside, investors are going to focus on management’s comments. A key question is: how quickly can the business get back to ‘normal’? The sooner Qualcomm can past the near-term noise, the sooner investors can focus on the upcoming good news . And that could drive Qualcomm stock higher.
Watch the Sector
But there’s one more aspect to the near-term outlook of QCOM stock that’s worth watching: the performance of the rest of the sector. Texas Instruments (NASDAQ:TXN) kicked off earnings season for the chip sector with a disappointing outlook. Investors have chosen to focus on the good news from Lam Research and Intel, however, as the Philadelphia Semiconductor Index, a widely-used measure of valuations in the industry, sits at all-time highs.
It remains to be seen, however, whether that optimism will hold. Earnings from Advanced Micro Devices (NASDAQ:AMD) on Tuesday were mixed, and its guidance was somewhat soft. Other, smaller chipmakers will have their say in coming sessions as well.
With the company’s results unlikely to truly answer long-term questions, analysts won’t raise their price targets on QCOM stock and fresh money won;t come into the stock unless QCOM gets good news from outside sources. The most likely source of that good news is industrywide strength that confirms the longer-term opportunities of QCOM stock.
So Qualcomm’s earnings, on their own, can move the stock higher. But for a real, sustained rally, some outside help looks necessary.
As of this writing, Vince Martin has no positions in any securities mentioned.
