So far in 2020, Qualcomm (NASDAQ:QCOM) stock is down about 13%. However, that number tells only half the story. On March 18, the stock hit a 52-week week low at $58. Now, it is hovering around $76. In other words, in about five weeks, shares of the chip maker have gone up by about 31%.
As we start a big earnings week, long-term Qualcomm shareholders are wondering who may ultimately win the tug of war between the bulls and the bears in the rest of the year. The company will report Q2 FY20 earnings on Apr. 29.
I wouldn’t suggest betting against the leading mobile-chip giant in the long run. But if you do not currently own Qualcomm stock, you may want to wait before you commit new capital into the company. Due to the recent rapid increase in price, in the coming days, there is likely to be volatility with a downward bias in the shares. Prospective investors may consider adding the company to their portfolios if the price declines toward $70 or below. Here’s why.
How Qualcomm Makes Money
Regular InvestorPlace readers would best know Qualcomm for its Snapdragon suite of system-on-chip (SoC) semiconductor products, which underpin smartphones.
The group’s other main source of revenue is mobile-phone royalties and licensing. Qualcomm’s patent-licensing division collects royalties from 3G and 4G technologies that it helped invent. These royalties have been its competitive advantage over the years.
Qualcomm applied for its first commercial patent for code division multiple access (CDMA) technologies in 1986. And it began licensing its CDMA patents in 1990. In 1993, the U.S. Telecommunications Industry Association established CDMA as a standard of cellular telecommunication. Since then, the company’s innovations as well as licensing revenues have flourished.
According to the company, revenues from Samsung constitute more than 10% of consolidated revenues. Similarly, revenues from Hon Hai Precision Industry, which trades as Foxconn Technology Group, and other suppliers to Apple, also constitute more than 10% of consolidated revenues.
For many chip and technology companies, 2020 was supposed to be the year of 5G. However, the COVID-19 pandemic has understandably taken over so many aspects of life for citizens as well as businesses.
Nonetheless, it would be important to remember that life and technological developments will continue in the rest of the year. And Qualcomm will likely play a dominant role in 5G, replicating its success with 3G and 4G mobile networks. Many analysts agree that its outlook for 5G modems used in smartphones is extremely strong
In fact, management regards Qualcomm as “the driving force behind the development, launch, and expansion of 5G.”
During the mobile revolution of the past decade, Qualcomm’s chips enabled device connectivity for billions of people worldwide. And management’s past performance can provide an important context when we evaluate how Qualcomm’s future in technological leadership and innovation may prove.
The Pandemic, China and Qualcomm Stock
In general, China means both demand and supply for chip stocks. The country consumes more than 50% of all semiconductors made worldwide. Furthermore, many technology companies either have manufacturing plants in China or use Chinese companies in their supply chains.
At the height of the U.S.-China trade wars in 2018 and 2019, Qualcomm was one of the first companies to warn about the effects of the tensions on its earnings.
In early February 2020, on a conference call following the release of Q1 results Akash Palkhiwala, Qualcomm’s chief financial officer, said that management saw “‘significant uncertainty’ around the impact from the coronavirus on handset demand and supply chain. Based on the information we have at this time, we are widening and reducing the low end of our guidance range.”
Later, on April 16, China announced that in Q1, its economy contracted for the first time on record. Its gross domestic product (GDP) fell 6.8% YoY. In the fourth quarter of 2019, the country had grown 6%.
And between February and now, we have an important part of the global economy in a lockdown situation.
Therefore, recessionary realities in China or worldwide may have further adverse effects on the group’s revenue and business outlook for the rest of the year.
What to Expect from Q2 Earnings
In 2019, as the leading supplier of mobile SoCs, weak smartphones sales had been a major concern for the company. Nonetheless, the QCOM shareholders were able to look past the soft sales and on Jan. 17, 2020, pushed the stock price to a 52-week high of $96.17.
When it reported Q1 earnings in February, it beat analysts’ estimates. Quarterly revenue totaled $5 billion, And Qualcomm came out with earnings of 99 cents per share.
However, investors did not find the results strong enough to inject fresh capital into the stock. Since then, the share price has been in a downward trajectory.
When the company reports Q2 earnings, the Street will analyze three main segments:
- QCT (Qualcomm CDMA Technologies): semiconductor business, over 71% of revenue
- QTL (Qualcomm Technology Licensing): licensing business, about 28% of revenue
- QSI (Qualcomm Strategic Initiatives): makes strategic investments, less than 1% of revenue
As the numbers above show, QCT provides Qualcomm with most of the revenue through sale of mobile chipsets. Yet wireless patents provide most of the profits. In other words, the group’s higher-margin licensing unit supports the growth of its lower-margin chipmaking business. Its portfolio of wireless patents is the largest globally.
If China or other countries see economic contraction in the rest of the year, then its revenue and earnings will likely suffer.
Qualcomm is a high beta stock that tends to be especially choppy around earnings release dates. Therefore, investors should be ready to embrace more volatility and have increased risk tolerance in the coming days.
And if you are a short-term investor, you may want to consider de-risking at this point.
Investor Takeaway on Qualcomm Stock
Thanks to its diversified revenue stream and the strength of its technological offerings, I believe that Qualcomm stock belongs in a long-term growth portfolio.
But ultimately, investors should always base their decisions on individual risk/return profiles. Due to the impressive increase in the QCOM share price since March 18, investors with paper profits may now want to ring the cash register.
Alternatively, you may also consider hedging your position with covered calls. For example, June 19 expiry ATM calls would offer investors some downside protection as well as enable them to participate in a potential up move following the earnings release.
Finally, those who do not own Qualcomm stock may consider buying into the company at any upcoming dip. Long-term investors would also benefit from the current dividend yield of 3.4%. Income investors know that they can compound their returns through reinvesting dividends from high-yielding stocks. Qualcomm has a history of increasing dividends. And the company has just announced a modest dividend increase for 2020. The dividend of 65 cents per common share is payable on June 25 to stockholders of record at the close of business on June 4.
Within two to three years, I expect Qualcomm stock to reach new highs.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.