Qualcomm (NASDAQ:QCOM) is in no-man’s-land from a technical perspective. It rallied hard and long into January, only to crash 40% from high to Covid-19 low. Luckily the fall came from near $96 per share, which was about 4% away from its dot com bubble all time high. We all know how that rally ended 20 years ago, and the rally into yesterday’s highs felt similar. Although this time, not all technology companies are in the same boat. Mega-caps like Qualcomm stock have good reason to demand their proximal valuations because the story is valid right now.
My concerns is for the frothier newer entrants to the tech trade.
The exuberance back then was over any stock that had ties to the internet. Now stocks like Logitech (NASDAQ:LOGI) Zoom (NASDAQ:ZM), and Slack (NYSE:WORK) are caught in a media frenzy after the quarantine. Suddenly the so-called experts are latching on to the online migration that is happening due to Covid-19. This is a concept we’ve been writing about for years but now has taken center stage.
Qualcomm also benefits from the mad grab for Nasdaq stock, but it has its own bullish thesis independent of this mania.
The Qualcomm Stock Fundamental Thesis Persists
Virus or not, Qualcomm will thrive for years to come. It is in the middle of the exploding demand for mobile tech. At the heart of it are the brains of a mobile phone. 5G is the new hot thing and Qualcomm is ready.
Just last week Qualcomm was part of the first commercial 5G phone on T-Mobile (NASDAQ:TMUS). It is great for a company to be an early mover in something that consensus dubbed the next big thing. Clearly, the company is offering more than just a story — it is hard facts. The fade of the exuberance over the beloved Covid-19 stock will not affect QCOM stock as harshly. Indirectly the stock will fall but there isn’t a lot of fat to trim.
The correction was much harsher than I expected. In early March I wrote about Qualcomm having upside potential. But the markets continued to collapse and with it went QCOM. It has now recovered past my last write up level so no harm done other than anxiety. Now it is back at a juncture where there are two ways one can approach my entry point back then. First, treat it as an investment to hold for the very long term so there is nothing to do. The second is to get out and thank the stars for the opportunity to exit the position with no damage.
The Threat of the Overzealous Nasdaq Investors
Markets are still so high, especially the Nasdaq. I shorted the it yesterday for a trade because I saw signs of piggishness. Also there were harmonic patterns that flashed warning signs.
Down went the markets minutes after my trade.
I am not noting this to boast, but to raise concern over the short term risk that exists in the markets in general. Even though QCOM may be worth owning, a correction in the Nasdaq will drag it down with it. So the question that investors have to answer is how much pain can they endure should this happen?
Fundamentally this stock is not cheap. It has a 24x price-earnings ratio and four times its sales so it could stand to lose some weight. In fact it is now more expensive than before the crash. It is important to note that a lot will change between now and next year involving the 5G launch. What Apple (NASDAQ:AAPL) does with 5G will also matter a lot. There are many uncertainties on that front. And then there are the conspiracy theories about 5G causing the virus outbreak but let’s not go there now.
As a fresh trade, I would prefer an entry in Qualcomm on a dip near $72 per share. I see the possibility for the stock to rest after recovering 61.8% of the correction. I mention this because it is an important number that the machines use for trading stocks. If the dip comes there will be buyers there. I would add more if the selling extends to $68 per share. Conversely, the bulls need to chip away at the neckline near $82 until they break through it. Because that would clear the path to the $90 February accident scene.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
