The last time I weighed in on Qualcomm (NASDAQ:QCOM), I noted that you shouldn’t be “too quick” to write off the stock.
“After dropping to $79.20, the Qualcomm stock has become an oversold bargain at its 50-day moving average with sizable, near-term catalyst.” That was on Dec. 10, 2019, as the stock traded at $84 a share.
Shortly after, shares of Qualcomm exploded to a high of $95.41. And for quite some time, all seemed fine.
That is, until the coronavirus scare forced the company to lower its earnings guidance for the next quarter. “There is significant uncertainty around the impact from the coronavirus on handset demand and supply chain,” the company’s CFO, Akash Palkhiwalas said.
Understandably that made investors nervous, especially when half of Qualcomm’s revenue comes from China.
Even Piper Jaffray analyst Harsh Kumar was concerned, noting, “We are wary of current valuation given the potential near-term coronavirus risk to 5G handsets.”
However, I believe that much of the fear has been priced in. Oversold shares of Qualcomm could easily refill its bearish gap around $90 for five key reasons.
Qualcomm’s Coronavirus Fears are Overblown
While the coronavirus story is still making its way around the world. the number of new cases is beginning to drop off in China, helping to cool concerns.
“We have analyzed the infections trend. So far, the daily infections in places other than Hubei have almost gone down to zero since late February,” Zhang Boli, one of the member of a research team to control the epidemic told The South China Morning Post. “According to our analysis of the statistics, we expect cities other than Wuhan in Hubei province will be basically free of [new] coronavirus patients in the middle of March.”
“The hope is that Wuhan won’t have daily new cases in late March,” he added.
Apple’s Profit Warning is a Temporary Setback
Apple (NASDAQ:AAPL) recently warned the virus would impact its March-quarter results. Of course, that announcement weighed on suppliers like Qualcomm.
“Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated,” said Apple. “As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors.”
Factor one, global iPhone supply will be “temporarily constrained,” they noted. And two, “demand for our products within China has been affected. All of our stores in China and many of our partner stores have been closed.”
However, we have to remember that such setbacks are only temporary. It has also created an opportunity for us to buy against the pessimism on related stocks.
Investors Overreacted to Qualcomm’s Warning
In a 10-Q filed with the SEC, Qualcomm noted “The recent outbreak of a coronavirus that originated in China may negatively impact consumer demand and/or our ability, or the ability of our suppliers, to manufacture products, which would negatively impact our business and results of operations.”
Of course, such comments raise concerns the company won’t be able to meet revenue or earnings growth forecasts for the year. But it also appears investors may be overreacting, especially with coronavirus cases decreasing in China. For me. as headwinds fade, it’s a great time to accumulate Qualcomm on the cheap.
5G Boom Offers Plenty of Upside Opportunity
As highlighted by InvestorPlace contributor Mark R. Hake, “The global 5G technology market is estimated to be $5.53 billion in 2020 and reach $667.90 billion by 2026, demonstrating a CAGR of 122.3% during 2021-2026, Zacks reported, citing data from Allied Market Research.”
Plus, one of Qualcomm’s biggest catalysts is still Apple, as I noted on Dec. 10. After ending two years of litigation with Apple, Qualcomm will provide 5G modems for Apple 5G iPhones. In addition, QCOM just expanded its 5G capability across its entire family of Snapdragon 8, 7 and 6 series mobile platforms for smartphones and other devices.
Analysts Remain Bullish On Qualcomm
Analysts are bullish about the chip-maker’s long-term outlook with a rollout of 5G.
Citi’s Christopher Danely told investors that the stock weakness and tamped-down expectations from coronavirus-fueled disruption “will be temporary.”
Qualcomm should be able to shake off the stock weakness as the chip-maker is “one of the largest beneficiaries” of the roll-out of 5G networks. Buy rating reiterated. Citi also raised its fiscal 2020 sales estimate to $21.7 billion from $21.2 billion and kept its price target at $108.00.
The Bottom Line on QCOM
The pullback in Qualcomm stock is an opportunity to buy. Coronavirus fear and Apple concerns have been priced into the Qualcomm stock. The 5G story still offers plenty of long lasting catalysts. And investors seemed to overreacted. With plenty of growth in store, there’s plenty to like about QCOM. I also believe the Qualcomm stock could run to $100 a share later this year.
Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.