Qualcomm Stock Almost At $90!- Way Too High?

by Trefis Team
-5.89%
Downside
106
Market
99.95
Trefis
QCOM
Qualcomm
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Qualcomm’s stock (NASDAQ: QCOM) is roughly unchanged since the beginning of this year, and at the current price of around $89 per share, we believe Qualcomm has a significant downside.
Why is that? The key is Qualcomm’s stock is still about 50% higher than it was at the beginning of 2018, a little over 2 years ago. Our dashboard What Factors Drove 50% Change In Qualcomm Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of this rise of the last 2 years is justified by the roughly 9% growth seen in Qualcomm’s revenues, despite a drop in chipset revenue. The rise in revenue was largely due to the legal settlement with Apple, who paid Qualcomm a one-time $4.7 billion payment, and signed a new chipset deal. This payment helped drive up net margins from 11% in 2017 to around 18% in 2019, with net income rising almost 80% to $4.4 billion.

Further, earnings growth, on a per share basis was a much higher 119%, driven by massive share buy-backs worth over a staggering $24 billion. Specifically, stock repurchases by Qualcomm led to an 18% drop in the outstanding share count, over the past 2 years.

Finally, Qualcomm’s P/E ratio dropped from about 35x at the end of 2017 to 24x recently. While Qualcomm’s P/E is still at the same level now, given the volatility of the current situation, there is a significant additional possible downside for Qualcomm’s multiple when compared to levels seen in the past years – P/E of 18x at end of 2016, and 14x in 2015.

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

The global spread of Coronavirus has meant there is much lower demand for smartphones right now, with new phones just not a priority for people at the moment. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe Qualcomm’s Q3 results in July will confirm the hit to its revenue. It is also likely to accompany a lower Q4 as-well-as 2020 guidance.

If there isn’t clear evidence of containment of virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 24x to 18x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $60.

For more insights into how Covid-19 could impact Qualcomm’s processor peer AMD, view our interactive dashboard Advanced Micro Devices Downside: How Low Can Advanced Micro Devices Stock Go?.

Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here

 

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