Over the past year or so, Qualcomm (NASDAQ:QCOM) has been one of the more volatile and divisive stocks in tech. After several years of range-bound trading, Qualcomm stock exploded higher in April, faded, rallied, and faded again.
The initial catalyst was the company’s surprise settlement with Apple (NASDAQ:AAPL). That smartphone manufacturer had withheld royalties amid a legal dispute that threatened Qualcomm’s lucrative position in the iPhone.
The resolution of that dispute cleared the path for the Qualcomm story to focus on its role in the 5G (fifth-generation) wireless rollout. Though the ensuing parabolic rally faded somewhat, by November QCOM stock had reached a new all-time high — and nearly doubled from its early-year lows.
Of late, however, that story has been overshadowed by a sell-off in broader markets which has pressured semiconductor stocks. Qualcomm stock fell 10% last week alone, roughly in line with the Philadelphia Semiconductor Index and the NASDAQ Composite.
Back at $78, QCOM looks to be at an inflection point. By the company’s own admission, the 5G story is going to take some time to play out. In the meantime, bulls likely see the market-driven sell-off as an opportunity. Bears perceive a much-needed correction. I’ve generally leaned toward the bearish case, but at this point I’ll grant that bulls, too, can make an intriguing case.
The Case for Qualcomm Stock
The case for Qualcomm stock at this point is relatively simple. Little, if anything, has changed in the story. Qualcomm still should have strong growth ahead. The Apple business is returning to normal. Qualcomm is in a similar dispute with Chinese smartphone maker Huawei, which may be settled at some point. 5G will drive more chip sales at higher prices.
Indeed, as I noted last year, Qualcomm’s three-year targets suggest the company should clear $6 in adjusted earnings per share by fiscal 2022 (ending September). Analysts in fact see profits back at that level by FY21, with consensus suggesting EPS of $6.11, rising to $6.36 the following year.
At the latter figure, QCOM trades at just 12.3x earnings. It hardly seems a stretch to imagine Qualcomm stock getting a 15x multiple, which would move its stock price near $100 within two years or so. Add in an attractive dividend that currently yields 3.17% and investors are looking at annualized returns in the range of 15%.
Better-than-expected profits, or a higher out-year multiple, could drive additional upside. And here too, analysts are more bullish, with the average price target sitting just above $100 — on a 12-month, rather than 24-month, basis.
Earnings Keep the Story Intact
That’s the story that led QCOM to a new all-time high in mid-January. And, again, nothing has really changed. Fiscal first quarter results last month came in nicely ahead of analyst estimates.
Guidance for Q2 looked strong as well. Qualcomm did say on the earnings call that third quarter performance would be in line with that of the second quarter, which suggested some modest disappointment relative to existing Street expectations. But as one bullish analyst correctly noted, “the upside in March [relative to consensus] was more than the downside in June.”
The three-year targets remain intact, per the call. New 5G handsets both from Apple and that operate on Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Android operating system should boost revenue and profits starting in the fourth quarter.
And yet QCOM stock dropped 10% in a week, is off over 11% so far in 2020, and has fallen almost 19% from January highs. The story is the same; the price is not. To bulls, that no doubt represents an opportunity.
Are Risks Rising Again?
Yet risks persist. The same risks that pushed QCOM stock below $50 on several occasions in the last few years have popped up again in 2020.
The Apple relationship remains somewhat cool. Apple acquired the 5G modem business from Intel (NASDAQ:INTC) in a bid to bring production in-house — and potentially displace Qualcomm. It was reported last month that the hardware giant is doing the same with antennae. Android phones still have a majority of the market worldwide, but declining Apple revenue does represent a headwind that could offset the benefits from 5G adoption.
Meanwhile, 5G stocks elsewhere aren’t exactly lighting the world on fire. Nokia (NYSE:NOK) has eked out a 5.7% gain year-to-date, but that comes after the stock hit a six-year low in November. Ericsson (NASDAQ:ERIC) is off over 8%. Cisco Systems (NASDAQ:CSCO) has declined 16% YTD.
5G is an opportunity — but its revenues aren’t purely incremental. Qualcomm obviously will lose revenue from chips designed for older models. To be sure, the new standard could drive faster adoption. That would eliminate the headwind of the lengthening smartphone replacement cycle that pressured QCOM in past years. Still, it’s possible that, to at least some extent, investors were, and remain, overly optimistic.
Perhaps most importantly, regulators are eyeing Qualcomm once again. The company has faced antitrust investigations worldwide, and it may have another one on its hands. The company disclosed last month that the European Union was probing its sales of radio frequency chips, which it is trying to bundle with modem sales.
Qualcomm already has paid billions of dollars in fines worldwide. It may be at risk for another levy — and an impediment to a core part of its 5G strategy.
The Debate Will Continue
Forced to choose, I’d bet QCOM stock rises from here. Valuation is more than reasonable. The company’s dominance in 5G should drive growth. Regulatory movement is a concern. But even a $1 billion fine is manageable in the context of a market capitalization just shy of $90 billion. The worst-case scenario — a fundamental reshaping of the company’s business, along the lines of the Microsoft (NASDAQ:MSFT) settlement in 2001 — seems unlikely.
But forced to choose, I’d probably look elsewhere in the sector — or in tech — for a “buy the dip” candidate. The risks here are real. A 12x multiple to FY22 profits does sound cheap, but QCOM stock has often traded at a lower multiple to forward earnings over the past decade.
Qualcomm certainly will have a chance to prove its skeptics wrong. Significant growth is going to arrive likely starting in Q4 as 5G picks up speed. Assuming U.S. stocks stabilize, that might be enough to retest January highs.
Still, Qualcomm needs to deliver, and manage a still-volatile business in a still-volatile market. That’s a lot to ask — and the valuation here isn’t yet remarkable enough for me personally to take that bet.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.
