At first, Qualcomm (NASDAQ:QCOM) stock fell off a cliff in response to the Covid-19 pandemic, with shares dropping from $90 in late February to $58 in late March. Then, QCOM stock sharply reversed course and rallied all the way back to $90 on optimism that the pandemic will inflict only temporary and minor damage on the smartphone chip maker.
This optimism is not misplaced.
The worst of the economic damage from the Covid-19 pandemic appears to be over, especially in the semiconductor markets, where Covid-19 actually had somewhat of a positive impact on demand in the cloud and gaming end-markets (semiconductor sales rose 7% year-over-year in the first quarter of 2020). Going forward, the fundamentals underlying the semiconductor market will only improve. As they do, most semiconductor stocks will stay in rally mode.
Qualcomm stock will be no exception. The company finds itself at the epicenter of an enormous 5G growth narrative that is really going to accelerate in the back-half of 2020 when Apple (NASDAQ:AAPL) launches its 5G iPhone.
All in all, this big rally in QCOM stock isn’t over. Thanks to rebounding semiconductor market fundamentals and huge 5G tailwinds, QCOM stock will keep pushing higher for the foreseeable future.
Here’s a deeper look.
Strong Growth Outlook
Qualcomm stock is supported by a strong growth outlook over the next 6 to 18 months thanks to enormous 5G tailwinds.
By now, most investors know about 5G. But the quick rundown is that this is a breakthrough in internet communications which is significantly faster, with significantly less latency, and significantly more network capacity than the current status quo (4G). In being those three things, 5G won’t just make our smartphones and tablets faster — it will enable an entire new class of IoT devices and technologies (like self-driving) to truly emerge.
It’s a $13+ trillion global opportunity.
And Qualcomm finds itself at the epicenter of the 5G megatrend.
Over the past several years, Qualcomm has amassed a portfolio of intellectual property in order to cement itself as the authority in smartphone chips. Chances are, if you have a smartphone, it uses a Qualcomm processor.
This dominance doesn’t stop at 4G. In 2019, among the first iteration of 5G smartphones, Qualcomm captured over 50% market share. Most analysts believe the launch of new 5G Snapdragon processors in 2020 will only extend Qualcomm’s dominance among 5G smartphones.
Assuming so, then Qualcomm is positioned for 2+ years of huge growth as the 5G revolution sparks a global smartphone upgrade super-cycle like we’ve never seen before.
Revenues will roar higher. Profit margins will significantly improve. Net profits will soar.
Against that favorable backdrop, it’s tough to see QCOM stock not going higher.
Attractive Valuation on Qualcomm Stock
Considering the company’s favorable 5G growth outlook, QCOM stock remains attractively valued today.
The price-to-sales multiple sits around 4. The cash flow multiple is 13, and the forward earnings multiple is 16. Qualcomm stock also features a nice 2.6% yield.
Those are attractive valuation multiples for a company which, according to Wall Street estimates, is expected to grow revenues by 30%+ over the next two years, and earnings per share by nearly 70%.
It should be no surprise that the average price target on Wall Street for QCOM stock is $93 and steadily moving higher.
My numbers check this out. I think that 5G tailwinds will push Qualcomm’s earnings per share towards $6.50 by 2022. Based on a market-average 17-times forward earnings multiple and a 10% annual discount rate, that equates to a fiscal 2020 price target of about $100.
Thus, I think QCOM stock can and will go higher from here.
Bottom Line on QCOM Stock
Qualcomm stock isn’t the best semiconductor stock to buy here and now. The valuation, while reasonable, doesn’t imply significant upside potential.
But I do think it’s a safe semiconductor stock to buy, mostly because the company finds itself at the epicenter of a 5G growth narrative which is going to forever change the world.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.