Could Qualcomm’s Stock Drop Below $40?

by Trefis Team
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Despite a 12% decline in Qualcomm’s (NASDAQ: QCOM) stock since the beginning of the year, at the current price of around $77, QCOM’s stock could see a significant downside, due to the impact of the coronavirus and oil price war crisis. QCOM’s stock is still 30% higher than what it was since the start of 2018, a little over two years ago. Our dashboard, ‘Qualcomm Inc. Downside: How Low Can Qualcomm Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

A significant contributor to QCOM’s stock price move over the last two years has been the growth in EPS, which grew from $1.66 in 2017 to $3.63 in 2019. Qualcomm’s EPS had plunged to -$3.39 in 2018, owing to a drop in revenue, and a rise in expenses, largely due to the legal dispute with Apple. With the settlement with Apple in 2019 leading to a jump in revenue and net income, GAAP EPS swelled in 2019, resulting in a lower P/E multiple.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis will likely have a significant impact on QCOM’s business, due to an overall decline in manufacturing, and lower consumer demand amid lockdown. Amidst the current crisis, buying a new mobile phone is just not a priority for most people, and the slump in device sales would mean a drop in demand for Qualcomm processors, which will directly impact the key business segments of QCOM. Given that several countries are on lockdown, the exports are also expected to take a hit as well. We believe QCOM’s Q2 results in May will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as full-year 2020 guidance.

Specifically, we believe the full-year revenue expectations at the time of Q2 results may be closer to $15.8 billion, about 30% lower than its 2017 revenue of $22.3 billion, and ~35% lower than the 2019 revenue of $24.3 billion. The market isn’t going to stomach this well, and QCOM’s P/E multiple is likely to shrink by about 20% from 24.1x in 2019 to 20x in 2020.

QCOM’s earnings margin can also shrink to about 15%, from the 20% seen in 2019, as significantly lower volume and lower chip pricing will impact the overall net income for QCOM. This would mean a double whammy of 45% lower EPS and 20% lower P/E multiple, translating into QCOM’s price drop of ~50%, to about $38 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed during late Q2 or early Q3, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.

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