How To Make Sense Of Qualcomm’s 10% Drop?

by Trefis Team
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Amid the broader technology stock sell off, Qualcomm’s (NASDAQ:QCOM) stock has fallen nearly -10% in the last 5 trading days. What could best explain this? Simply – the large disconnect between the performance of the global economy and equity markets, especially how technology stocks have skyrocketed in valuation this year amid global economic woes. So what comes next for Qualcomm investors? Could this move indicate the beginning of a trend? We assess Qualcomm’s recent market movement from three perspectives – (a) relative positioning in the market (b) underlying financial trends, and (c) the output of Trefis’ machine learning engine which looks at past patterns to predict near term behavior. Our dashboard Big Movers: Qualcomm Moved -9.55% – What Next? lays this out succinctly.

What relative positioning suggests: Are you a value investor who identifies and invests in under-priced securities based on market comparisons? Then this perspective might help. Including this recent move, Qualcomm has returned about 40% to investors this year  already. Although Qualcomm’s trailing P/E multiple has decreased about 10% to 45.74 as a result of the recent drop, it is still more than 90% above where it was when the year started. The stock is clearly a lot more expensive to buy now. But here is the twist, its competitors aren’t trading any cheaper. Compared to Qualcomm’s P/E multiple of 45.7, the figures for Broadcom, Ericsson, and Motorola Solutions stand at 92.2, 116, and 32.

What fundamentals suggest: Want to consider long term investment in Qualcomm? Then you may want to give more weight to its underlying financial performance. Qualcomm’s recent market move is the exact reverse of its long term stock price trend. It has returned nearly 88% for its investors between 2017 and now, with half of that coming this year alone. Do fundamentals back this price increase? Qualcomm’s revenue has increased 9.1% from $22.3 billion in 2017 to $24.3 billion in 2019. However, for the last 12 months, this figure stands at $20 billion which is nearly 17.6% below 2019 numbers. That may be a cause for concern, but what about profitability? Qualcomm’s net margins have increased significantly from 11% in 2017 to 18.1% in 2019, the figure stands substantially lower at 13.7% for the last 12 month period – again, a slight cause for concern.

What machine learning algorithm suggests: More interested in short term returns? Then you might want to give this perspective more weight. Our engine analyzes past patterns in stock movements to predict near term behavior for a given level of movement in the recent period. It suggests nearly 29% probability of Qualcomm moving up by 10% in the next 21 trading days, but a higher 35% probability of it falling another 5%. Curious to know how it works? Check out this dashboard where you can play around with different levels of movements for Qualcomm to understand near term return probabilities.

So, Qualcomm appears to be a somewhat unclear bet for investors at this moment, they may have to wait and watch before making an investment decision. Meanwhile, there are other investment options. Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

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