Stocks in several sectors have plummeted after the coronavirus-driven market meltdown. Airline, energy and tourism stocks have taken a big hit due to the black swan event. Other stocks that have been relatively resilient. Qualcomm (NASDAQ:QCOM) stocks is one of the names that has not collapsed.
Yes, Qualcomm stock has declined by 18.8% from its 52-week highs, but the correction has largely been in-line with the index correction. I believe that the stock is worth considering at current levels and this column will discuss the reasons for this view.
What follows is predicated on what seems like the peaking of the novel coronavirus in the United States and Europe. There are uncertainties related to the timeline for renewed economic growth. Therefore, for any stock, it makes sense to gradually accumulate. Risk-off trade still remains dominant even as markets have seen some respite from selling pressure.
Strong Fundamentals and Positive Outlook
At the onset, I want to mention that Qualcomm recently announced a 5% hike in its dividend. The company’s annualized dividend now stands at $2.60. At a time when companies are looking to conserve cash, the decision to increase dividends underscores the company’s fundamental strength. More importantly, it’s a reflection of the growth Qualcomm is expecting related to the launch of 5G.
In addition to dividend growth, Qualcomm will also be looking at “opportunistic” buybacks. So, from a cash perspective, the company is well positioned to navigate the crisis and continue to reward shareholders.
Analysts have also been bullish on QCOM stock amidst market uncertainties. Deutsche Bank analyst Ross Seymore has increased his stock price target to $96, which implies a 36% upside potential from current levels of $72. He believes that China-related headwinds will soon turn into tailwinds. Citigroup has also maintained a Buy rating on the stock with a target price of $98.
Further, if we look at the median price target of 25 analysts, it’s currently at $100, indicating upside potential of 35-40% over the next 12 months. Clearly, Qualcomm stock is attractive at current levels in the low $70s.
5G Remains Key Growth Driver
CEO Steve Mollenkopf made two important points in his recent interview with CNBC. First, the company has maintained the timeline for 5G launch and expansion even after the COVID-19 crisis. Second, demand in China has returned to near normal levels. These are bullish comments and there is little doubt that 5G will be a game changer for Qualcomm. China is indeed looking at accelerating spending plans on 5G infrastructure as one way to boost economic growth.
However, not everyone is as bullish for the foreseeable future. According to Samsung, the smartphone market is likely to slump this year and 5G is unlikely to be the savior.
Similarly, the pandemic in South Korea might have waned consumer interest related to 5G. The same hold true for the United States and Europe.
So, even if the supply chain is back to normal and 5G devices hit global markets, consumer sentiment could be a headwind. This is one reason to remain cautious even as Qualcomm is bullish.
Yet, even if this concern holds true, 5G will gain traction beyond the current year. Qualcomm is well positioned financially to navigate few quarters of relatively weaker sales.
From a cash flow perspective, the company’s licensing business is rewarding. For FY2019, the segment reported $4.6 billion in revenue with earnings before tax margin of 64%. With investment in research and development, I remain positive on the outlook for the licensing business.
Concluding Thoughts on Qualcomm Stock
It’s important to note that 5G mobile handsets are not the only growth driver for Qualcomm stock. According to the company, “over 125 million vehicles use our broad range of automotive solutions, including telematics, in-car connectivity and infotainment platforms.” To be sure, the company has made significant inroads in the automobile industry.
Similarly, Qualcomm is looking for growth opportunities in IoT, always-connected PCs and cloud AI. In the coming years, these businesses will deliver growth and cash flow upside.
These factors make Qualcomm stock attractive after the recent correction. For investors bullish on the outlook for the next generation of mobile, QCOM is a best bet of 5G stocks to watch.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.