Chip maker Qualcomm Inc. (Nasdaq:QCOM) has been on a wild ride over the past few months. The shares were on a downward trend for most of 2017 to Broadcom Inc. (Nasdaq:AVGO) acquisition rumours appeared in October, sending shares of QCOM from $50 to $70 in a hurry.
But then the President of the United States Donald trump is, in fact, blocked the attempts of acquisition of AVGO. The merger talks went cold. Shares of Qualcomm fell. The decline continues due to a confluence of challenges, ranging from Chinese regulation in costly lawsuits with weak demand for the smartphone.
Now, QCOM stock at the $50 level Oct 2017.
Time to buy? Close, but not yet. The basics mean these stocks are not undervalued yet, while sentiment remains negative. Thus, the best course seems to wait until the dust settles.
So let’s take a deeper look.
QCOM was swallowed by savagery
The only way to describe what QCOM has experienced over the last few months just “wild”.
The company has a long-standing dispute with Apple. (Indexshares aapl) so-called “Qualcomm tax”, which is Qualcomm going on your smartphone related patents. Apple believes that cut Qualcomm is too big. Chipmaker disagree. So these two are stuck in court.
But investors forgot about this when from Broadcom came to console and tried to capture Qualcommm only to be thwarted by trump.
Now, investors are again concerned about litigation from Apple. Plus, QCOM proposed acquisition of NXP semiconductors N. V. (Nasdaq:NXPI) is increasingly difficult, as Chinese regulators more and more concessions from QCOM in the background of what has become a political confrontation between China and the United States
Qualcomm also pledged $ 1 billion in savings AVGO after a failed takeover. These reductions begin now, in the form of layoffs and dismissals is rarely a sign of good times for the company.
As if things couldn’t get any worse, the United States also banned the sale companies of spare parts for Chinese smartphone manufacturer ZTE is a Corporation. Qualcomm is the biggest chip supplier for ZTE, so this ban is significantly negative consequences for QCOM Finance.
Meanwhile, the entire chip sector has been weak recently against the background of what is reported as unusually weak demand from smartphone and cryptocurrency markets. Shares of QCOM, of course, were dragged down with the rest of the sector.
And just to further complicate things, QCOM former Chairman Paul Jacobs, who was ousted in March after informing the company of their intention to take Private QCOM, now pushes forward with his own attempt from the outside.
All together, QCOM absorbed in a wild situation that lacks clarity and does not indicate a stable growth in the foreseeable future.
QCOM stock is not cheap enough on a standalone basis
This lack of precision, estimates earnings for fiscal 2019 had a downward trend over the last several months from $4 to around 3.75$.
This trend should continue, because it is not similar to lost business from ZTE or permanently weak demand for the smartphone is fully baked into these estimates. Thus, when the dust settles, the EPS estimates for fiscal 2019 is likely to hover around 3.60$.
Historically, average 13.5 x forward earnings on those 3.60 $earnings mean year-end target price of $ 49.
Given the lack of clarity on whether going forward the company’s growth prospects, I am not a buyer of QCOM stock is above $ 49, if of Jacobs ‘ go-Private attempts at gaining serious momentum.
A lot of questions. Not a lot of answers.
Because of this lack of clarity, QCOM stock is best avoided at current levels. But any dips in the $40 should be seen as a buying opportunity.
At the time of this writing, Luke Lango was a long time to revise.