Qualcomm Stock Too Expensive At $115?

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QCOM: Qualcomm logo
QCOM
Qualcomm

Qualcomm stock (NASDAQ: QCOM) is up around 32% since the beginning of this year, but at the current price around $115 per share, we believe that Qualcomm stock could see significant downside.

Why is that? Our belief stems from the fact that Qualcomm stock has jumped almost 2x from the low seen at the end of 2017. Our dashboard What Factors Drove 96% Change In Qualcomm Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

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Qualcomm is a major mobile chipset manufacturer and a market leader in wireless technology, providing solutions to all leading smartphone manufacturers. The stock rise over the past two years came due to a 9% growth in revenue, which combined with an 18% drop in outstanding share count, translated into a 33% growth in revenue per share (RPS).

Further, Qualcomm’s P/S ratio rose from 3.9x in 2017 to around 4.3x in 2019. While its P/S has risen further to 5.7x currently, given the volatility of the current situation, there is significant possible downside for Qualcomm’s multiple, especially when compared with previous years: 3.5x in 2018, and 4.3x as recently as late 2019.

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

The global spread of Coronavirus has meant there is a drop in demand for smartphones right now, with buying a new phone not a priority for people at the moment. Further, the delay in the global launch of 5G could prove to be a setback for Qualcomm in the near term, and chipset sales could be affected. However, Qualcomm’s licensing revenue should rise back up to pre-2019 levels due to its renewed licensing deal with Apple. But we expect the drop in chipset sales to outweigh the rise in licensing revenue in the near to medium term. We believe Qualcomm’s Q4 ’20 results in October will confirm the hit to its revenue and net income. It is also likely to accompany a lower 1H 2021 guidance.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 5.7x to around 5x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $100.

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