Qualcomm (NASDAQ:QCOM) reported strong first-quarter results on Feb. 5. Not only that, its guidance for Q2 2020 was also excellent. And yet Qualcomm stock has fallen below where it was trading before its earnings announcement.
Naturally, the fact that the company provided wobbly third-quarter guidance had analysts more conservative about Qualcomm’s fate in 2020 than investors might have expected. After all, the company’s Q1 2020 results were the company’s first with sales growth after seven consecutive quarters of sales declines.
Qualcomm should be on its way to $100, according to InvestorPlace contributor David Moadel. “If there ever was an opportune time for QCOM to finally surpass $100, I believe this is it. 5G will remain a powerful force for the tech sector and for Qualcomm stock throughout the year,” Moadel wrote. “In turn, this will take the smartphone user’s experience — and the share price — to the next level in 2020.”
While I don’t think there’s any question that Qualcomm is going to benefit significantly from the global transition to 5G, the coronavirus in China could have a lot to say about where Qualcomm’s stock heads in 2020.
I’m not nearly as confident as my colleague about Qualcomm piercing through $100 in 2020. I suspect it’s got just as good a chance of dropping below $80 as it does to hit triple digits. Here’s why.
We Don’t Know the Ultimate Effect of the Coronavirus
Qualcomm’s CFO Akash Palkhiwala stated in the company’s conference call that there’s “significant uncertainty around the impact from the coronavirus on handset demand and the supply chain.”
In the second quarter, Qualcomm’s outlook calls for 88 cents in earnings and $5.3 billion in revenue. That’s higher than the consensus estimate of 86 cents in earnings and $5.1 billion in revenue.
It’s possible concerns about the coronavirus won’t affect Qualcomm’s business. However, there is mounting evidence that the virus will be worse for the global economy than the 2003 SARS outbreak in 2003.
“If the current and unprecedented confinement measures in China stay in place until the end of February, and are lifted progressively beginning in March, the resulting economic impact will be concentrated in the first half of 2020,” a recent report from IHS Markit report suggests, “with a reduction of global real GDP of 0.8% in Q1 and 0.5% in Q2.”
Back in 2003, China’s economy contributed a little more than 4% of the world’s GDP. Today, China’s contribution is four times what it was during the SARS outbreak.
As InvestorPlace contributor Patrick Sanders said recently, “Nearly half of Qualcomm’s revenue last year came from China.”
On this figure alone, I would be skittish about buying Qualcomm stock at present. Any bad news between now and its next report in early May would most likely be the kiss of death for its share price.
In early January, I said that Qualcomm could be had for a better price than the $86 where it was trading at the time. With the coronavirus added to the pile, I don’t think there’s any doubt investors will be able to buy it for less in the next few months.
I like the company, but dislike the stock price.
The Bottom Line on Qualcomm Stock
Wells Fargo analyst Timothy Arcuri recently maintained his “neutral” rating for Qualcomm while raising its target price by four dollars to $91, providing 4% upside at current prices.
The analyst expects Qualcomm to grow sales by 20% in calendar 2020, 30% in 2021, and 10% in 2022. However, he also states that despite Qualcomm’s potential gains from 5G, the company’s stock could hardly be considered under-valued.
I said something similar in my January article, calling Qualcomm “an excellent company with an expensive stock.” With the coronavirus expected to wreak havoc on the global economy, my opinion of Qualcomm’s valuation hasn’t changed one bit.
If you’re looking to buy its stock, I’d wait for it to fall some more before taking the plunge. Below $80, it’s a much better entry point.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.