Qualcomm stock continues to lead the way as 5G networks blanket cities far faster than expected and tech titan Apple (AAPL) rolls out its first-ever 5G iPhone. But the wireless chip giant also warned the global semiconductor shortage is widening and could last longer. Is QCOM stock a buy right now?
Qualcomm Stock Technical Analysis
Shares of Qualcomm (QCOM) failed a breakout past a 161.17 buy point, according to MarketSmith chart analysis. Amid mixed earnings last month, Qualcomm stock triggered the 7% to 8% loss-cutting sell rule. More recently, the chip stock are looking for support at the 200-day line after undercutting the 50-day line.
Sources told Reuters March 12 that Qualcomm is struggling to keep up with demand as the chip shortage that first hit automobiles spreads to phones and electronic gadgets. Earlier in March, incoming CEO Cristiano Amon told CNET the shortage “keeps me up at night” and warned that it might not end until late 2021 — slightly worse than an earlier prediction.
QCOM stock rallied massively for most of 2020. Shares took a hit in December amid a report that Apple could make its own iPhone modem chips, cutting out Qualcomm.
The relative strength line for Qualcomm stock has fallen to a roughly five month low. That follows a strong uptrend in the latter half of 2020. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.
QCOM stock owns an IBD Composite Rating of 65 out of 99. In other words, it’s outperforming 65% of all stocks based on combined fundamental and technical metrics.
Investors generally should focus on stocks with CRs above 90 or 95.
Qualcomm earns an Accumulation/Distribution Rating of E, which shows heavy selling by institutions in the past 13 weeks.
The chipmaker boasts strong institutional backing. As of December, 3,185 funds owned Qualcomm stock, up 6% from September. In fact, Qualcomm shows five quarters of rising fund ownership, according to the IBD Stock Checkup tool.
Thirteen analysts rate QCOM a buy, six have a hold, and none has a sell, according to Zacks Investment Research.
Qualcomm Earnings And Fundamental Analysis
Qualcomm stock has an EPS Rating of 81 out of a best-possible 99, and its SMR Rating is an A, on a scale of A+ to a worst E. The EPS rating scores a company’s earnings growth vs. other companies, and its SMR Rating scores sales growth, profit margins and return on equity.
On Feb. 4, the San Diego-based fabless chipmaker beat earnings estimates for its fiscal first quarter, but fell short on revenue. On a year-over-year basis, Qualcomm earnings surged 119% while sales climbed 62%. By segment, revenue rose 79% for handset chips; 48% for Internet of Things; 157% for radio frequency front-end; and 44% for automotive chips. Qualcomm also offered strong Q2 guidance.
However, the revenue miss sent the chip stock lower. Qualcomm also said that supply shortages in 5G smartphones will persist in the first half of this year. And it sees weaker Q2 profit margins, as 5G phones enter the low-end of the market.
Global handset shipments fell a worse-than-expected 7% in the December quarter due to the Covid-19 pandemic, Qualcomm said. Management now sees shortages persisting until late 2021, after earlier predicting a recovery in the “second half” of the year.
Analysts at Canaccord Genuity advised investors to buy the dip. They predicted strong Quacomm earnings in 2022 and beyond. “As 5G smartphones ramp, the mix of 5G grows benefiting Qualcomm with 50% greater content than a 4G smartphone.”
But Citi analysts warned that the upside to Qualcomm stock from the current 5G upgrade cycle is over. They declared that more downside looms, including lower margins.
Analysts expect Qualcomm earnings per share to rise 75% in all of fiscal 2021, increasing a further 12% in 2022. The company returned to growth in 2020 after several years of declines. Sales are seen rising 32% in 2021 and 9% in 2022, per Zacks.
In recent years, Qualcomm earnings slumped on company-specific and industry woes. Profit headwinds have eased as 5G wireless ramps up. Moreover, Apple and Chinese telecom giant Huawei returned as customers, after QCOM settled legal feuds over patents and licensing payments.
Among other fundamental metrics, Qualcomm’s annual pretax margin is 24% and the annual return on equity is 92%. Both are strong numbers.
Qualcomm Stock News: Apple, Huawei, Tencent
Qualcomm has two main revenue streams: It makes integrated circuits and system software for device makers. It also holds wireless patents, which produce licensing or royalty income.
But Qualcomm’s chip business faces challenges as customers bring chips in-house. Its licensing business faces scrutiny in the U.S. and across the globe.
In fiscal 2020, equipment & services accounted for 69% of total revenue and licensing for the rest. While smaller in size, licensing is more profitable and has a bigger competitive advantage.
Qualcomm’s 5G chips power the Apple (AAPL) iPhone 12. They also power Android devices, including cheap 5G phones. Last year, reports that Apple is working on its own cellular modem hit Qualcomm stock.
According to Qualcomm management, 5G networks are being built far faster than expected. They will enable ultrafast downloads and enable things like connected factories.
Baseband chips supplied by Qualcomm enabled the success of earlier iPhones and the smartphone revolution. In fact, Qualcomm is the world’s biggest supplier of mobile phone chips. But it is, first and foremost, “the steward of patents” for wireless technology, according to Morningstar.
In addition to smartphones, Qualcomm chips will power the world’s first 5G personal computer. The 5G chips and devices will eventually power the Internet of Things, self-driving cars and augmented reality apps.
Qualcomm and China’s Tencent (TCEHY) have partnered on mobile gaming devices. It’s a big win for the U.S. chipmaker: Mobile gaming, powered by 5G cellular services, should support real-time and multiplayer experiences.
As these new growth drivers pick up steam, a major leadership change is coming. After 26 years with Qualcomm, CEO Steve Mollenkopf retires in June, with President Cristiano Amon set to replace him.
QCOM Stock And Rival Chip Stocks
Qualcomm belongs to the Fabless Semiconductor industry group, which ranks a mediocre No. 95 out of 197 groups tracked by IBD.
Fabless chip companies hire contract foundries, such as Taiwan Semiconductor (TSM), to make the chips they design. Other chip companies own their fabrication plants. But the chip industry is extremely cyclical.
Top stocks to buy or watch among fabless chip companies include AMD (AMD), Nvidia (NVDA), Inphi (IPHI), Monolithic Power Systems (MPWR) and Lattice Semiconductor (LSCC). Several of those make chips for data centers, which are in high demand as internet use booms during the work-at-home push.
NVDA and Monolithic Power belongs to the IBD 50 list of top growth stocks. So does Taiwan Semiconductor.
Qualcomm objects to Nvidia’s $40 billion acquisition of British chip designer Arm.
Is Qualcomm Stock A Buy Right Now?
The 5G chip leader made a big earnings comeback, after years of declines. Qualcomm boasts solid margins and return on equity.
Apple and Huawei, two of the world’s biggest smartphone makers, are back as customers. For Qualcomm, 5G smartphones spell a huge opportunity. It’s also tapping new areas of growth, such as automotive and IoT chips.
However, Qualcomm confronts an “incredible crisis” in the chip supply chain, in the words of its president and incoming CEO, who cautions that shortages will likely persist until year end. Analysts warned of weaker margins as low-end 5G phones proliferate. Other hurdles remain, including uncertain China-U.S. ties and the coronavirus shock to the global economy.
From a technical perspective, QCOM stock’s breakout past a 161.17 buy point failed. Shares are no longer in buy range, while the RS line is lagging.
Bottom line: Qualcomm stock is not a buy right now. But the chip stock is one to watch as fundamentals improve after a tough few years.
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