The Qualcomm (NASDAQ:QCOM) roller coaster ride has thrilled traders throughout 2019. And with QCOM stock back on another steep incline, it’s time to ask whether you should get off before the next potential plunge. Just since April, Qualcomm stock has surged from $55 to $90, fallen back to $65, and has now soared back to $90. What to make of all this?
The volatile trading coincides with quite a mix of news. Take the latest earnings report, for example. Qualcomm beat expectations for revenues and EPS comfortably. On the other hand, revenues dropped 17% year-over-year despite the “beat.”
There’s a definite glass half full, glass half empty element at work here.
A Short-Term Reprieve For Huawei
On Friday, QCOM stock got what appears to be good news. The Trump Administration announced that they will be giving another two-week pass for Huawei to keep dealing with American businesses. This while Trump and China try to reach a more permanent deal on intellectual property, among other disputes that have caused the trade war to rage on for much longer than most had expected.
Huawei spent more than $10 billion on components from U.S. suppliers including Micron (NASDAQ:MU), Intel (NASDAQ:INTC) and Qualcomm in 2018. The sharp reduction in those orders has weighed heavily on the semiconductor space throughout 2019.
Another extension for Huawei should be a positive for QCOM stock, but investors will likely still wait for more clarity regarding the trade situation with China before getting too excited. Commerce Secretary Wilbur Ross noted that he felt the need to grant the extension to Huawei to ensure continued access to 3G and 4G services for rural areas. Qualcomm, on the other hand, is counting on Huawei as it relates to the roll-out of 5G.
Qualcomm Stock Is a 2020 Story
Analysts didn’t quite know what to make of the most recently released earnings report. Some weighed in positively, others showed more caution. That’s because we still really don’t have a clear idea of what’s going to happen next year.
In 2020, the global effort to deploy 5G mobile connectivity is supposed to kick into high gear. There are some signs this is about to get going as planned. Other signs, such as the trade war and some mobile carriers struggling with weak cash flow and high debt levels, cause concern that the 5G roll out may take longer than planned.
Qualcomm, for it’s worth, is projecting 3% handset unit growth for 2020, with a range of 1.75 billion to 1.85 billion units using Qualcomm-licensed technology. QCOM sees roughly 200 million of that being 5G-enabled phones. That’s a meaningful portion of the market, but 5G won’t become the majority just yet. Qualcomm earns substantial revenues off 4G phones as well, so that’s not necessarily a bad thing, though efforts to manage inventory could lead to short-term earnings fluctuations.
Some Reasons to Hold On
While there’s a great case for taking trading profits, longer-term investors have an argument for holding QCOM stock as well. For one thing, the patent-based business model is insanely profitable. Qualcomm scores an incredible 35% return on invested capital (ROIC) meaning that it generates 35 cents in profits for every dollar it puts into its business. A normal tech company would be closer to 10-15% on the ROIC measurement.
When you are unusually good at converting investments into profits and cash flow, it allows aggressive returns of shareholder capital. Qualcomm has done precisely that. It pays a healthy dividend of 2.7% even after the huge run-up in the stock price. On top of that, QCOM has a gigantic share buyback program which boosts earnings per share and keeps a strong bid under the price during periodic bouts of market unease.
QCOM Stock Verdict
Just a month ago, I made the case for why Qualcomm stock would have better days ahead. Sure enough, QCOM stock quickly traded up 20%. And I stand by many of the arguments in my previous article. Qualcomm should, in fact, have a better year in 2020. The signs are still promising on that front.
With the quick run-up from $75 to $90 per share, however, QCOM stock has already priced in much of the potential improvement. Morgan Stanley noted as much recently. They raised their price target slightly, to $90 a share, while downgrading the stock to neutral. In short, QCOM stock has caught up to the near-term upside potential.
QCOM stock is still trading around 16x forward earnings, which is hardly expensive. However, those estimates price in a lot of growth. At $75 a share, Qualcomm had little downside if the trade war dragged on or other obstacles appeared that would impede the 5G roll-out.
Up at $90, however, QCOM stock more fairly balances risk and reward. Long-term investors are still likely to end up happy, but for traders, you might want to wait for a dip before taking a position.
There’s one other alternative worth considering as well. If you really like the 5G story but aren’t sure about Qualcomm stock at this price, our Will Ashworth pointed out the First Trust Indxx NextG ETF (NASDAQ:NXTG) as a solid ETF that holds both QCOM stock and many other rivals that will benefit as next generation connectivity emerges around the world.
At the time of this writing, Ian Bezek owned QCOM stock and INTC stock. You can reach him on Twitter at @irbezek.