At first glance, Qualcomm (NASDAQ:QCOM) stock may look like a dividend investor’s dream. It’s a solid yield from a well-known tech company. However, QCOM stock has been very volatile lately.
Spats with companies like Apple (NASDAQ:AAPL) that were suddenly and unexpected resolved sent shares of Qualcomm exploding higher. Then a run-in with the government poured the pain back on, while Apple’s move to buy Intel’s (NASDAQ:INTC) modem business also added volatility back into QCOM stock.
It has left investors wondering what they should do with Qualcomm stock. Should they gobble it up and accumulate it for the dividend, or take a pass thanks to the volatility and look elsewhere?
Truth be told, there are plenty of solid dividend stocks to buy that are easier to stomach. However, there could be opportunity in Qualcomm stock. We just need to get the proper price, first.
Valuing Qualcomm Stock
Qualcomm stock pays out $2.48 per share in annual dividends, giving it a 3.10% yield. That’s a pretty solid payout, particularly in tech. Thanks to big rallies in Apple, Microsoft (NASDAQ:MSFT), and others, it’s hard to find a good yield in this group.
That said, we have to be in a stock for more than its dividend. Particularly in the case of QCOM stock. If income is the only goal, there are safer, more consistent and less volatile picks.
Unfortunately, Qualcomm’s growth profile is volatile like its stock. Estimates call for a 15.1% decline in revenue this year, followed by 13.2% growth in 2020. However, 2020’s estimates for $21.85 billion is actually lower than the $22.73 billion in sales the company generated in fiscal 2018.
The silver lining here is that earnings don’t tell as similar of a tale. Analysts expect earnings of $3.47 per share this year. That’s down 6% from the $3.69 per share in 2018 and leaves QCOM stock trading at about 22 times this year’s earnings. However, in 2020, expectations call for earnings of $4.21 per share, up more than 21% from 2019.
That leaves Qualcomm stock trading at about 18 times forward earnings.
Due to the volatility in earnings and revenue, as well as the volatility in the stock price and the headlines around Qualcomm, investors will want a price that reflects that added risk. At $77.50, I don’t think it’s there.
A lower stock price will decrease the valuation, increase the yield and lower the risk profile of QCOM stock. As you’ll see on the charts below, $65 is an attractive level from a technical perspective. However, it’s also a big enough reduction in the current valuation to make Qualcomm more attractive from a fundamental perspective as well.
At that price, QCOM stock will also yield 4%.
Trading QCOM Stock
Currently near $77.50, it’s hard to imagine QCOM stock trading down to the $65-area. Unfortunately, that’s the price we are looking at to get into the name.
Click to Enlarge
Earlier this year, QCOM stock again broke out, running to $88.82, before pulling back to $65. This time though, the former resistance mark held as support, marking an important turn in events.
We now have QCOM stock forming an ascending triangle (blue lines), a bullish technical development. It’s where a rising trend squeezes the stock price against a static level of resistance. In this case, resistance comes into play near $80. A close over $80 could vault Qualcomm stock back up to its prior 52-week highs.
Qualcomm is setting up as a potentially lucrative trade. However, should this pattern fail to play out, investors should be looking for a correction. Whether it’s stock-specific news or a broad-market wipeout, investors should keep an eye out for a decline down to the $65 zone. A pullback to this area that holds as support sets up a very solid risk/reward situation.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL.
