Qualcomm’s (NASDAQ:QCOM) shares were already trading up over 50% in 2019 when the company released its Q4 ‘19 earnings after Wednesday’s close. This is a stock that has grabbed investors' attention for the right and wrong reasons many times in the past and Wednesday was no different.
The smartphone chip maker reported non-GAAP EPS and revenue that both beat estimates even while the latter still fell 17% YOY. Shares gapped up 7% on Thursday’s open and it wasn’t the lukewarm results that sent them there.
Stronger than expected guidance for 2020 was what really put smiles on investor’s faces and they happily bid the stock up to its highest levels since January 2000 during trading on Thursday. Specifically, forecasts for projected growth in the 5G grew considerably brighter.
The stock is definitely in favor after Wednesday’s report, but it hasn’t always been smooth sailing.
While the company is comfortably treading water while it waits for 5G to take off, it’s still awaiting judgment regarding antitrust sanctions from the 9th Circuit Court. These antitrust investigations have dogged the stock for years and the Federal Trade Commission (FTC) even accused the company of abusing its ‘dominant market position’ in 2017. Qualcomm’s products are considered so essential that an agency of the federal government basically told them to lower the prices.
Regulatory issues have also given investors enough headaches in recent years but at least these seem to be finally abating. Qualcomm announced a settlement with Apple (NASDAQ:AAPL) in their high profile royalties case this past May, one aspect of which saw them enter into a multi-year supply agreement to supply the iPhone maker with 5G modems.
Alongside Apple, many of the big names in the smartphone industry like Huawei, Sony, and Samsung also use Qualcomm chips which is both a blessing and a potential curse. The US embargo on Huawei imports has hurt sales and has definitely been a thorn in investors’ sides. Qualcomm is a company that grows with its customers so anytime they sneeze Qualcomm is at risk of catching a cold.
All these companies are vulnerable to any slowdown in smartphone growth and there are some gathering clouds in that regard. Qualcomm has had to cut estimates for device sales a couple of times, a crucial factor that’s pretty much outside the company’s control. Gartner, the world’s leading research company, warned in July of this year that smartphone sales were on track to suffer their worst ever decline.
In fact, naysayers this week were quick to point out that Qualcomm would have missed estimates in its most recent report had it not cut forward guidance last quarter.
The Glass is Half Full
That said, Apple is committed to launching its 5G iPhone this time next year and will need Qualcomm chips for every single one of them. While Apple flirted with Intel as its supplier of chips for a while in 2016, the latter has since bowed out of the race, leaving the path open for Qualcomm to become the sole supplier of chips to the US’s sole smartphone manufacturer.
As we inch towards the inflection point for 5G, each earnings report from both Apple and Qualcomm takes on an increasing significance. Qualcomm has effectively nailed its colors to the 5G mast on Apple’s ship and a lot of eyes will be focused on the Mobile World Congress 2020 in February when other device makers are expected to announce upcoming smartphones. No doubt Qualcomm will be looking to own a large piece of these pies.
Qualcomm - $100 on The Horizon?
For now, investors appear to be cautiously optimistic. Cowen raised its price target from $80 to $100 while UBS stayed neutral. The $100 level looks like a natural target from a technical perspective. The stock was turned back from the $90 mark in May of this year and retreated a hefty 30%. Since then though its logged higher lows and higher highs in a healthy-looking march back up the chart.
Shares closed two cents below $90 on Thursday and traders will be watching to see if it can break and hold the all-time-high territory just above it into the weekend.
Fundamentally, Qualcomm is extremely well-positioned to be the main benefactor of the coming 5G takeoff. If it can stay on the right side of antitrust regulators, then the future is bright for this best in class industry behemoth. It just needs to make sure it doesn’t fly too close to the sun.
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