With shares just below their 52-week high, is now the time to buy Qualcomm (NASDAQ:QCOM) stock? There are risks buying at the top. But even in a runaway bull market, Qualcomm stock could go higher in 2020.
Before rallying from around $70 a share in August to $91.79 at the Jan. 16 close, investors discounted the company’s geopolitical and regulatory risks. But now, with trade tensions cooling, and the increased likelihood of the company winning its Federal Trade Commission (FTC) appeal, investors have jumped back into Qualcomm stock.
Is it too late to join the party? Upside may be less than before, but there’s some left on the table. With the rise of 5G, the firm benefits from increased mobile chip demand. Qualcomm stock may now trade at higher multiples than in months past. But with 5G-fueled growth, runway remains for valuation to further expand.
Several Catalysts are Fueling Upside
Even as the stock rips past $95 a share, the market may be underestimating 5G’s upside potential for Qualcomm stock. As InvestorPlace contributor Ian Cooper noted in his Jan. 13 write-up, Canaccord analyst T. Michael Walkley is highly bullish on the company. In November, the analyst raised his price target from $101 a share to $87 a share.
But on Jan. 15, Walkley again raised his price target, sharing that he now believes the stock could hit $115 a share. In his latest investor note, the analyst discussed how the company is “well positioned to benefit from the transition to 5G”. Walkley also discussed the potential overturn of last years’ FTC ruling (more on that below). This would ensure the future of the company’s licensing business, supporting a higher valuation for Qualcomm stock.
Qualcomm is a clear winner in the 5G transition. But shares continue to trade at a lower valuation than more high-flying chip names like AMD (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA). Yet, Qualcomm has some other catalysts in the pipeline that could sustain growth through the 2020s.
Take, for example, the vehicle technology catalyst, as InvestorPlace’s Dana Blankenhorn recently discussed Qualcomm’s Snapdragon Ride self-driving car platform. It may be a while before self-driving cars are the norm. Yet, increased usage of advanced driver-assistance system (ADAS) technology offers near-term growth opportunity.
This innovation offers growth potential for chip makers like Qualcomm. According to Bank of America’s Vivek Arya, ADAS could help drive auto-related semiconductor sales growth to 25% a year. To be sure, 5G may be the key growth driver, but, long-term, new applications for Qualcomm’s technology could move the needle.
FTC Appeal Win Could Improve Valuation
Shares are just off their 52-week high of $96.17. But the market continues to discount Qualcomm due to regulatory risks. Based on analyst consensus for FY2020 (ending September 2020), Qualcomm trades at a forward price-to-earnings ratio of 21.2. This is higher than slow-growing Intel’s (NASDAQ:INTC) forward P/E of 13.3. But, as I mentioned above, Qualcomm’s valuation continues to trail that of AMD and Nvidia.
Qualcomm stock may never reach AMD or Nvidia-level valuations. But even a slight expansion of the company’s forward P/E could move the stock above $100 a share. If the company’s forward P/E expands to 25x fiscal year 2020 (ending September 2020) analyst consensus, the stock could rise to $105.75 a share. But that’s not all. Consensus calls EPS to be around $6.10 in FY21. If it appears Qualcomm will hit this estimate, shares could top $120 a share. And that’s assuming the company’s forward P/E stays around 20.
But, for now, a lot rides on the future of Qualcomm’s QTL licensing business. As you may know, the company is appealing the FTC’s ruling that their “no license, no chips” policy is anti-competitive. Restrictions on the company’s licensing practices would obviously hurt Qualcomm stock. In its appeal, the company is in a fight for its future. But with the Trump administration wanting to argue in favor of Qualcomm, the company may have the edge in winning its appeal.
Upside Remains For Qualcomm Stock
With the 5G catalyst fueling growth, Qualcomm stock could reach new highs in 2020. Valuation has improved thanks to last year’s run-up. But even if the company’s valuation does not expand, shares could move well above $100 a share in the next year.
But the FTC appeal remains a key risk. The odds may be tilting in Qualcomm’s favor. But if they fail to overturn last year’s decision, the company’s lucrative licensing business could be in jeopardy. A bad outcome could push shares back down (at least) to the $70-$80 price level.
Weighing upside against the downside, what’s the verdict? Consider a small position. Don’t bet the ranch, but Qualcomm stock remains an opportunity. Even at current price levels.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.