Qualcomm (NASDAQ: QCOM ) stock dropped yesterday after the company reported strong fourth -quarter numbers which were overshadowed by weak first-quarter revenue guidance. That weak guidance was largely the result of QCOM's ongoing litigation with Apple (NASDAQ: AAPL ), a headwind which QCOM stock has been exceptionally sensitive to over the past few quarters. That sensitivity continued yesterday, as QCOM stock dropped more than 7%.
But this might be the time to get bullish on QCOM stock.
Qualcomm's growth outlook isn't all that great, and QCOM stock is being weighed down tremendously by ongoing litigation. But it's a multi-faceted company, and its growth drivers are becoming diversified away from Apple. As a result, while QCOM's growth going forward won't be great, its growth outlook is still good and stable.
Good and stable isn't priced in at current levels. QCOM stock is now trading below 13 times its forward earnings, and it has a 4%-plus dividend yield. Historically, whenever Qualcomm stock gets this cheap, it rebounds. The same dynamic should repeat this time around, given the stability of the company's fundamental outlook.
As a result, QCOM stock looks attractive in the wake of its post-earnings dip. The long-term upside of QCOM is muted by the company's moderate growth prospects and the litigation it's facing. But Qualcomm stock is too cheap here, and a near-term recovery rally is likely in the cards.
The Fundamentals Are Good, But Not Great
Qualcomm's fourth-quarter numbers were much better than expected across the board, as its revenues, margins, and profits all beat expectations. But all aspects of its first-quarter guidance were much weaker than expected.
Thus, the present dynamic at Qualcomm is still one defined by an ongoing battle between Apple-related headwinds and Internet of Things and artificial intelligence tailwinds. The outcome of this battle remains uncertain, and it's worth noting that Apple accounts for a big chunk of Qualcomm's licensing revenues.
But the transition away from AAPL is already happening, as Qualcomm's revenues are expected to fall between 13% and 26% in Q1, and it does appear that after Q1, the worst will be over. On its earnings call, QCOM sounded bullish about its back-half earnings and revenues, while the Street expects its revenue growth to resume after this year.
In the big picture, then, Qualcomm will be just fine even without Apple. QCOM remains a big player in the smartphone world, and it has partnered in multiple 5G rollouts. The company is also getting a big boost from the auto industry, where it's crafting a leadership position for itself in infotainment and 5G- connected cars. Also, Qualcomm's Snapdragon product is starting to be used in big, continuous- growth markets, like augmented reality/virtual reality, AI and machine learning.
As a result of all of these trends, Qualcomm is increasing its exposure to products that have nothing to do with AAPL, thus lessening its reliance on Apple. Over the long-term, this strategy will enable Qualcomm's top and bottom lines to increase by moderate amounts.
Consequently, the fundamentals supporting QCOM stock aren't great, but they aren't awful either. Instead, they are simply good, and good growth should be enough to spark a recovery rally by QCOM .
QCOM Stock Is Too Cheap
After its most recent selloff, QCOM is trading below 13 times its forward earnings, with a 4% dividend yield. Every time QCOM stock has gotten this cheap in the past, it has bounced.
Over the past year, Qualcomm stock has tended to rebound after the shares fell to about 13 times the company's expected forward earnings. The company's forward multiple dipped below 13 about a year ago, right before QCOM surged on rumors that it would be acquired by Broadcom (NASDAQ: AVGO ). Once that chatter died down, QCOM stock fell, and it bottomed when the forward multiple got close to 13 again.
Meanwhile, every time the dividend yield of QCOM has risen above 4% since 2016, the stock was in the process of bottoming and proceeded to reverse course shortly thereafter.
Thus, history indicates that with Qualcomm stock trading below 13 times its forward earnings and featuring a 4%-plus yield, the stock is due for a recovery rally. Since the fundamentals underlying the stock are largely the same as they have been for the past few quarters, history should repeat itself soon.
The Bottom Line on QCOM Stock
The long-term upside of QCOM is limited by the company's mild growth prospects and litigation headwinds. But the stock has become too cheap to ignore, and history says the shares should rally soon.
As of this writing, Luke Lango was long QCOM and AAPL.
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