It took some time for Qualcomm (NASDAQ:QCOM) to become regarded as a top AI play, but since it took shape late last year, Qualcomm stock has been on a tear. Shares in the mobile chip company have surged by more than 52% over the past six months.
Changing hands for around $215 per share, QCOM is now near all-time highs. Yet after this sudden run-up in price, is it time to take profit, or to let it ride for additional gains?
On the surface, it may seem as if shares have soared too far, too fast. With the AI growth catalyst now more strongly accounted-for, have shares become “priced for perfection?”
Then again, maybe not. Based on traditional valuation metrics, it’s possible that Qualcomm shares remain reasonably priced.
Taking into the latest regarding the generative artificial intelligence growth trend, this company may be well-positioned to exceed expectations.
Why Qualcomm Stock is Now an AI Favorite
Since “ChatGPT” entered the public lexicon in late 2022, gen AI has become an increasingly popular investing trend.
Initially, the chip stocks that surged first due to the emergence of this trend were those of companies benefiting from skyrocketed demand for AI-capable data center chips.
Hence, mobile-focused Qualcomm stock didn’t see much of a boost. Instead, investors sat on the sidelines, as what was top of mind about Qualcomm at the time was the continued slump in mobile chip demand.
However, starting in mid-2023, QCOM started gaining “AI underdog” status.
Appreciation of Qualcomm’s potential to benefit from rising AI smartphone chip demand began to rise. However, it wasn’t until the closing months of 2023 that QCOM leveled up again to “AI favorite” status.
That’s when the company unveiled its Oryon CPU and Snapdragon X Elite AI-PC platform.
Since this unveiling, excitement about AI-PC growth potential, plus improved results from Qualcomm’s existing non-AI lines of business, have kept the stock on a bullish trajectory.
Again, following this winning streak, it may appear that it won’t take much to cause QCOM to reverse course. Yet if you take into account several factors, it’s hard to see this happening anytime soon.
Moderately-Priced, Despite Extreme Growth Potential
Many AI stocks have become overvalued following their rise in popularity, but I wouldn’t say that’s the story here with Qualcomm stock.
At current prices, QCOM trades for only 21.7 times forward earnings. Compare that to other top AI chip stocks, such as Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD).
NVDA and AMD trade for 50.3 and 45.4 times forward earnings, respectively.
Sure, there’s some logic to this valuation gap. Both of these cutting-edge chip companies are expected to deliver much stronger levels of growth over the next few years.
However, Qualcomm’s expected growth during this time frame is nothing to sneeze at.
Far from it, in fact. Consensus forecasts call for QCOM to report earnings growth of nearly 45% this fiscal year (ending September 2024), and nearly 22% next fiscal year. For the fiscal year ending September 2026, growth could really take off.
Yes, forecasts for FY26 range widely, but AI-PC adoption forecasts keep rising. The prospect of Qualcomm hitting the high end of these forecasts is looking increasingly likely as well.
That means growing potential for QCOM’s earnings to hit $15, maybe even close to $20 per share, within two years.
Hold On Tight to this Top Contender
Only time will tell whether Qualcomm can double its earnings over the next fiscal years. However, even if growth comes in at a more moderate pace, QCOM can stay an AI winner.
As the company starts profiting from the AI-PC trend in a big way, and its legacy mobile chips business carries on with its recovery, don’t assume shares will simply move in tandem with increased earnings.
There is strong potential for a market rerating as well. Maybe not to a valuation on par with NVDA and AMD, but a rerating to 25 or even 30 times forward earnings may be within reach. In other words, $250-$300 per share.
With this additional upside on the table, there’s no need to take profit just yet. If you own Qualcomm stock, hold on tight to this top contender. If you’ve yet to buy, feel free to do so at current prices.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
