On the surface, Qualcomm (NASDAQ:QCOM) may seem like a reasonable bet amid the novel coronavirus pandemic. For one thing, most states have now reopened or are reopening with certain restrictions. Theoretically, this should drive positive momentum for the company’s retail-focused semiconductor technologies. Additionally, Qualcomm stock is inherently an investment levered toward national security. It really is too big to fail.
Better yet, optimists have more reason to cheer thanks to the company’s encouraging results from its fiscal second-quarter earnings report. Prior to the disclosure, covering analysts forecast that QCOM would deliver earnings per share of 78 cents. Instead, actuals came in a dime higher. On a diluted basis, EPS was up 14% year-over-year.
On revenue, analysts anticipated a haul of $5.025 billion. Again, the tech giant beat the target, ringing up $5.21 billion. This was up 7% YoY. After some choppy trading following the release, Qualcomm stock is now in the black.
Demand Drop Hard to Dismiss
Part of the reason for the immediate volatility was that earnings report wasn’t entirely positive. As expected, management disclosed that during its fiscal Q2, the pandemic precipitated a decline of 21% for demand of smartphones relative to prior expectations. However, the magnitude of the demand drop was obviously difficult for many traders to dismiss.
Further, QCOM warned that Q3 could feature even-lower phone shipments due to a lackluster global economic environment. Specifically, the chipmaker forecast a 30% reduction in handset shipments, which doesn’t bode well for Qualcomm stock nor for the underlying company’s partners.
Interestingly, though, Qualcomm’s 5G ambitions remain unchanged, anticipating feeding demand from 175 million to 225 million 5G-equipped phones this calendar year. Is this enough to trust QCOM?
Headlines Don’t do Qualcomm Stock Any Good
At the same time that QCOM released its Q2 earnings report, Chinese rival Huawei had some news of its own. According to CNBC, Huawei’s semiconductor business unit passed Qualcomm “as China’s number one chip supplier for the first time as the coronavirus impact on the country’s smartphone market hit the U.S. giant.”
That was the other contributing factor to the wild Qualcomm trading. During the increasingly heated U.S.-China trade war, Qualcomm saw significant disruption to its China business. As CNBC explained, the tech firm supplied chips to Huawei’s rivals. But because the trade war brought an export ban on Huawei, the Chinese outfit began stealing market share domestically.
Now, the coronavirus threatens to change the narrative for QCOM. If there’s one thing that Qualcomm stock responds to more than anything else, it’s changing narratives.
Like marriage, this is a “for richer or for poorer” catalyst. Recall that in recent years, Qualcomm stock gyrated wildly due to headlines and their implications. Particular sour spots included QCOM’s bitter disputes with Apple (NASDAQ:AAPL) and antitrust allegations. Moreover, the trade war was an event that stymied the semiconductor manufacturer well before the world knew about Covid-19.
However, QCOM stock skyrocketed when in April 2019 when Apple resolved its disputes with the company. Later, shares would spike again when the U.S. and China agreed in principle to a phase one trade agreement. When the deal was signed in January of this year, QCOM saw a nice bump up.
But it appears that we’re going to go back to square one. Or, as CNN suggested, we may go back to square negative one. In its view, the antagonism between the two nations may take a generation to heal.
Obviously, that’s not good news for Qualcomm stock.
Ugly Geopolitical Environment
Using sharp rhetoric, the Trump administration has blasted the Chinese government at almost every opportunity. That of course doesn’t include the time when the President thanked China for handing the coronavirus in late January.
Not surprisingly, a Pew Research Center poll discovered that most Americans have an unfavorable view of China. At 66%, it’s the highest rating of negativity since Pew initiated the poll in 2005. Additionally, Americans view the world as being in a better place if the U.S. remains the global leader.
The problem here is multi-pronged. Primarily, it’s hypocritical. Americans weren’t complaining while they were busy getting cheap crap from China, all the while allowing the political and corporate elites to sell America out to the highest Chinese bidder.
Now, we’re complaining? As the kids like to say, GTFO.
Second, the U.S. is not in a position to negotiate favorable terms with China. Don’t get me wrong: I’m no fan of China’s communist regime and I’ve previously applauded Trump’s tough stance on Beijing. But the selling out of America to the Chinese long preceded him by decades.
Today, the U.S. finds itself depending on the world’s second-largest economy for its manufacturing and its medicine, among many other things. If we’re not careful, we may find ourselves depending on them for our food. In all likelihood, playing hardball with the Chinese is not going to work, putting Qualcomm stock in limbo.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
