I know it’s hard to hear this if you’re a Qualcomm (NASDAQ:QCOM) shareholder, but the provider of chip technology to handset makers and wireless network builders is not a great investment. QCOM, unfortunately, is just a mediocre stock.
Say what?
There’s no question Qualcomm is a great company, the quality of its 1,000 patents makes it a technology leader, but when it comes to investing that doesn’t always make it a great stock.
A Closer Look at QCOM Stock
Coming off a great year in the markets, one in which it delivered a total return of 59% to shareholders, you would think I would be shouting from the rooftops about what a great stock it is. After all, the only stat that counts in this buy-and-sell game we play is profits and losses.
Over the past 5-, 10-, and 15-year periods, Qualcomm’s annualized total returns were 6.1%, 8.6%, and 6.4%, respectively. By comparison, 3M (NYSE:MMM), a company and stock that some feel is well past its prime, delivered annualized total returns of 4.5% (5 years), 10.1% (10 years), and 7.0% (15 years) over the same period.
There is no question that the 2019 run-up had everything to do with the excitement surrounding the global 5G buildout. Set to begin in earnest in 2020, Qualcomm and Huawei are at the front of that bus, and that’s got investors salivating.
In November, I argued that getting to $100 a share won’t be easy for Qualcomm, given it faces some licensing headwinds in 2020. That reality, combined with Qualcomm’s history of crossing into the $90s only to fall back below $80 shortly after that, suggests it’s not going to be nearly as easy to go from $89 to $100, where it’s trading as I write this, as it was to go from $57 to $89.
“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 wrote back in November. “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.”
Right now, it’s hard to argue that Qualcomm’s not performing. The numbers don’t lie.
So, either Qualcomm’s returns will revert to its historical mean in 2020, or the 5G opportunity is so real that it’s setting course on a new trajectory that will include years of double-digit annual returns.
QCOM Stock Is Overvalued
My InvestorPlace colleague, Faisal Humayun, recently stated the Qualcomm’s earnings growth wouldn’t accelerate until 2021, suggesting that a 1.5 PEG ratio for a stock whose company will have to wait more than a year for the real fireworks to begin, is excessive.
Don’t get me wrong. Like my colleague, I believe that Qualcomm is a great long-term hold, but I would be shocked if investors didn’t get an entry point in 2020 that’s significantly lower than $89.
InvestorPlace’s Laura Hoy, who I believe to be one of the better prognosticators on the IP bench, recently suggested that Qualcomm’s bright 5G future has already been priced in.
“The trouble for stocks like Qualcomm, whose future benefits have already been celebrated, is the potential for any bad news to cause a nosedive,” Hoy wrote in December. “I think bad news is likely for Qualcomm in 2020. Apple (NASDAQ:AAPL) has vowed to supplement its Qualcomm chips with its own in-house components as early as 2022 — a move that would significantly damage the firm’s future revenue stream. As Apple moves forward toward this goal, Qualcomm’s share price will likely suffer.”
Essentially, Hoy argues that the near-term rewards of buying close to $90 are far outweighed by the risks that lie in front of Qualcomm in 2020.
The Bottom Line on QCOM Stock
With the markets, in general, having come off a big year, I find the odds of Qualcomm delivering anywhere near a 59% total return in 2020 to be slim.
Qualcomm is an excellent company with an expensive stock.
That said, if you own it, I wouldn’t sell, but I would put some cash aside to buy below $80. History suggests you’ll get your chance sooner than you think.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
