Not long ago, Qualcomm (NASDAQ:QCOM) stock seemed like a lay-up. It was a name investors were salivating to buy on a dip. Part of that was due to the juicy dividend yield of Qualcomm stock. Others liked it for its secular growth play.
After all, recall that not long ago Apple (NASDAQ:AAPL) threw out its ligations against Qualcomm. Further, Apple actually paid the company — to the tune of several billion dollars — and came to an agreement with Qualcomm to supply its iPhone.
Could it get any better than that? Turns out, it could.
Not only was a huge risk lifted when Apple put its legal case to rest, but a huge reward was reaped when the two agreed to work together. On top of that, the secular trend for 5G remains in play.
While many believe that investments in this area will be delayed, they will not be skipped. The industry is moving toward 5G and Qualcomm will be a beneficiary of that movement, with or without the novel coronavirus.
Valuing Qualcomm Stock
There are a few things I really like about QCOM. The first is its dividend. With the 10-year Treasury bond yielding just 64 basis points, Qualcomm’s 3.5% dividend yield looks awfully tasty. Unlike many REIT stocks — again many, not all — cash flow is stable and business is going well. That gives investors confidence in Qualcomm’s dividend.
What I really like about Qualcomm is that the company is still forecast to grow. A number of stocks will see top- and bottom-line contractions this year. That’s completely understandable given the coronavirus situation. With the economy grinding to a halt, it’s hard to do business.
That’s true for Qualcomm, too. Estimates have come down notably for the next two quarters, as well as the full year. Consensus estimates now expect earnings of $3.74 per share for 2020. While that would be up from $3.54 per share last year, it’s down from where estimates stood just 30 and 60 days ago, at $4.02 and $4.19 per share, respectively.
Ultimately, analysts expect just 5.6% earnings growth this year on 8.1% revenue growth. It’s very difficult to predict results for this year, let alone for 2021. However, the consensus is quite bullish that business will come roaring back for Qualcomm next year. Estimates call for 56% earnings growth to $5.83 per share on revenue growth of 26.2%.
Based on this year’s numbers, it leaves QCOM stock trading at about 20 times earnings. Not screamingly cheap, but certainly not a sky-high valuation. Stocks that are generating positive growth this year — Microsoft (NASDAQ:MSFT), PayPal (NASDAQ:PYPL), etc. — are garnering higher valuations.
However, companies that can show growth are fetching a premium. There’s no reason Qualcomm shouldn’t get a higher valuation, too.
Trading QCOM Stock
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So what do we have here? We have a stock that trades at roughly 20 times this year’s earnings estimates, which are set for mid-single-digit growth.
However, growth is positive despite this rocky year and set for very strong growth in 2021. Additionally, Qualcomm pays a 3.5% dividend yield.
With solid fundamentals on our plate, let’s look at the technicals.
QCOM stock looked like it was destined for $100. Instead, shares topped out around $95 near the start of the year before getting caught up in the vicious coronavirus pullback. However, before that pullback gained momentum, you’ll notice that the stock found support from the 20-week and 50-week moving averages.
After bouncing off the 200-week moving average and reclaiming the $62 breakout zone, QCOM stock is now finding the 20-week and 50-week moving averages as resistance. For bulls to gain more control, they must reclaim these marks. However, there could be an opportunity for longer-term investors too.
Qualcomm has already reported earnings, removing a potential short-term risk. We either want to see a further dip in the stock or a breakout over the moving averages. If investors can get a dip in the stock — say to $65 — they get a better risk/reward, a higher yield and a lower valuation.
If they buy the breakout, they get momentum and a better technical setup. So it depends on what a particular investor leans on more, the technicals or the fundamentals. Those that blend the two can consider initiating a position and adding on a breakout or buying the dip. Either way, Qualcomm is a quality long-term name.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL.
