Not only did Qualcomm (NASDAQ:QCOM) report strong earnings on Nov. 6., but the wireless chipmaker guided higher for the first quarter of fiscal 2020. That sent Qualcomm stock higher, reaching a 52-week high of $94.11 before settling back into the mid-$80s.
My InvestorPlace colleague Bret Kenwell recently discussed how QCOM stock could hit $100. While I like Bret’s enthusiasm, suggesting that Qualcomm could be cheap at 21.5 times this year’s earnings, the company faces headwinds that could act as a drag on its stock price moving beyond the mid-$80s.
Don’t get me wrong. I’m supportive of owning Qualcomm stock over the long haul.
It’s just that its volatility is more than many investors can handle. That’s why my most recent article about Qualcomm suggested buying a 5G ETF to reduce company-specific risk of owning Qualcomm on its own.
For those of you who can’t or won’t find your way to buying an ETF to play the 5G secular trend, history could be the biggest reason Qualcomm stock will have a hard time getting to $100.
It Will Get to $100
There’s no doubt that Qualcomm will hit $100. Someday. However, that day might not come until late 2020 or beyond. History has everything to do with my rationale.
Since Qualcomm went public in September 1991, QCOM stock has hit $80 on six occasions: January 2000, March 2014, March 2019, June 2019, September 2019, and October 2019. On every time but the last, Qualcomm stock retreated to below $80.
I’m not a technical analyst, but it’s as clear as day that $80 provides massive resistance to its stock price moving into and staying in the $90s.
Several InvestorPlace contributors have written in recent days about the issues that Qualcomm faces that could act as an impediment to QCOM hitting $100. Dana Blankenhorn’s argument that the company’s battle with Huawei acts as the biggest impediment to its stock price rings true.
Rob Enderle, Principal Analyst for the Enderle Group, an emerging technology advisory firm, put it this way:
“In the background, Huawei is being pilloried by the U.S. government, but positions as the 5G leader in much of the media, bringing into question Qualcomm’s actual leadership and pointing out that the big picture is that this is a battle between countries, not companies, I expect Huawei will eventually emerge as the technology winner, largely because it has the full support of its government.”
These two arguments suggest that Qualcomm might not benefit from 5G as much as people expect. Compounding the company’s problems is its ongoing legal troubles with the Federal Trade Commission.
In May, a federal court ruled in favor of the Federal Trade Commission, who argued that Qualcomm licensing practices constituted a monopoly. In August, the 9th U.S. Circuit Court of Appeals put on hold the federal court’s ruling.
“The earlier ruling would have required Qualcomm to renegotiate all of its existing chip and patent deals, as well as make new deals conform to the requirements. The stay granted Friday puts on hold the effect of parts of the ruling while the appeals process, which could take a year or more, plays out,” Reuters reported August 23.
As InvestorPlace’s Chris Markoch remarked, “It would seem that Qualcomm faces an uphill battle.”
To get to $100, Qualcomm has got to get the May ruling overturned. That’s because its licensing business generates 80% of the company’s profits. Any hit to this side of the business would affect the valuation it receives from investors.
The Bottom Line on Qualcomm Stock
I continue to like Qualcomm as a long-term hold.
However, the legal battle hanging over its patent licensing business will remain a significant headwind for the company and its stock.
Historically, it’s had a hard time pushing through to $100. If the May ruling by the federal court is upheld, I could easily see its stock price once more falling well below $80.
As my colleague Dana suggests, this will provide buying opportunities for long-term investors. An excellent place to start is below $80.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.