Here come the chip stocks and Qualcomm (NASDAQ:QCOM) is helping to lead the charge. This stock has been red hot lately, with QCOM stock ripping from $73 in early October to $94 just the other day. That’s up more than 28% in just a few weeks!
It’s got investors and analysts alike wondering if Qualcomm can get to $100. In fact, it’s got a lot of analysts not only wondering, but expecting it to get there.
Since the company reported earnings on Nov. 6, the stock has received at least eight price targets of $100 or more. The highest rings it at $115, which comes from Raymond James analyst Chris Caso. While $100 is roughly 14% above current prices, Caso’s target implies a whopping 31% upside from current levels.
Wouldn’t that give bulls something to cheer about.
5G, Huawei and Earnings
Qualcomm reported fourth-quarter non-GAAP earnings of 78 cents per share, 7 cents ahead of expectations. Revenue of $4.81 billion sank 17.5% year-over-year but beat analysts’ estimates by $100 million.
However, some investors felt mixed on the report. For starters, GAAP earnings of 42 cents missed estimates by 6 cents, while management’s first-quarter outlook for earnings and revenue was roughly in line with expectations.
Overall though, bulls found enough positive pieces in the report to justify bidding the stock higher. Many are optimistic on what 5G will do to smartphone demand, and thus, demand for Qualcomm’s chips. Should 5G make its way to the market as expected, this should be a demand booster for QCOM stock.
So, while the quarter had some not-so-great points — only inline guidance, big YOY revenue decline, etc. — the outlook for 5G is promising and that’s a tailwind for Qualcomm, not a headwind. Another tailwind? Huawei.
The Chinese tech company orders some $11 billion worth of components from U.S. companies. When it was blacklisted by the White House, companies like Intel (NASDAQ:INTC), Broadcom (NASDAQ:AVGO), Micron (NASDAQ:MU) and yes, Qualcomm felt the impact.
However, after giving a 90-day extension to U.S. companies to do business with Huawei, the White House plans to renew that extension for another 90 days. While that does leave potential risk in the intermediate term, it’s another tailwind for QCOM in the near term.
Valuing Qualcomm Stock
Need more catalysts? The big YOY decline in fourth-quarter revenue should be in the rear-view mirror now.
Analysts expect full-year revenue of $21.93 billion, up 13.1% from fiscal 2019. While full-year estimates are hard to gauge as they fluctuate throughout the year, double-digit sales growth is certainly a positive. As difficult as one-year predictions are, two-year predictions are even harder. Yet, if Qualcomm stock delivers on analysts’ outlook for fiscal 2021, it could realize a significant acceleration in revenue growth, up to 23%.
The same scenario exists for earnings, albeit in a more dramatic fashion.
Current estimates call for 2020 earnings of $4.20 per share, up 18.6% from 2019’s profit of $3.54 per share. For 2021, forecasts call for an acceleration up to 45% growth, with earnings ringing in at $6.12 per share.
The current estimates leave QCOM stock trading at 21.5 times this year’s earnings estimate. That could look downright cheap if Qualcomm can grow earnings and revenue 18.5% and 13% this year, respectively, and then accelerate those growth rates next year.
The risk here is obvious in that we’re dealing with estimates, some of which are almost two years out. But the catalysts for QCOM stock to $100 are obvious, too. Potentially robust sales and earnings growth, the coming 5G wave, renewed business with Huawei, a reasonable valuation and a 2.75% dividend yield in a low-rate environment.
Yeah, you can see why investors and analysts are bullish on this name right now.
Trading QCOM Stock
On the daily chart below, there are a few things to note for the Qualcomm stock price.
Click to Enlarge
Since reporting earnings, QCOM stock has been in a well-defined range. While $94 has been resistance on the upside, $89 to $90 has been support on the downside. A move below $88.32 — the post-earnings low — thrusts shares out of this range and puts a gap-fill down toward $85 within the realm of possibilities.
On the upside, a close above $94.11 — the post-earnings high — could very well kickstart a move to $100. While a pullback down to $80 would be attractive for dip buyers, it’s not a development I expect in the near term for QCOM stock. For now, watch $94 on the upside and $89 on the downside.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AVGO.
