Qualcomm (QCOM) stock gave back nearly 7% so far this month, and is down roughly 20% from where it was trading 3 months ago.
Occasionally, the market overreacts to corporate headwinds, giving the long-term, patient investor a second crack at a solid company. Is this the case for QCOM? 4-star Charter Equity analyst Edward F. Snyder doesn't think so. As he put it: "We expect the stock to have a rough ride as the company negotiates the many obstacles it faces in the next 12 months."
Snyder reiterates a Market Perform rating on the stock and reduces his estimates. (To watch Snyder's track record, click here)
What's causing investors to hit the exits? The wireless technology giant reported Q3 earnings last Wednesday, bringing in revenue of $4.9 million that missed consensus estimates of $5.1 million. Furthermore, profit slipped 34% since last year, but beat expectations. The most critical component of the report, however, was guidance for next quarter. While analysts were expecting revenue of $5.6 billion, Qualcomm management estimates $4.3 billion to $5.1 billion.
Qualcomm is at the forefront of 5G technology, but one near-term challenge is that the 5G transition is not fully underway yet. Most phones and networks are still on 4G, and the transition isn’t expected to gain steam until 2020. Snyder says he is not “convinced 5G will be the savior management is casting it as,” and believes that “there aren’t likely to be many 5G phones produced” given the high costs and tighter margins.
Since the switch to 5G is not yet in full-bloom, management blamed lower sales on lower 4G demand ahead of the transition. But Snyder does not believe that the upcoming transition is to blame for lower revenue and guidance. The analyst expects “the real culprits are Chinese consumers favoring lower-cost, non-Qualcomm phones and Huawei gaining share against other Chinese OEMs, neither of which are likely to abate anytime soon.” In China, the US-Chinese trade war is prompting many to opt for a Chinese-made phone, such as Huawei, in a move to favor Chinese brands over American.
Aside from 5G and China, Snyder sees trouble ahead for Qualcomm from the courts. While the company gained a few major victories earlier this year, a recent ruling went against the company, and required a change to their selling practices. While Qualcomm is appealing, Snyder says it will be hard for Qualcomm to "dodge the US District Courts’ bullet in the FTC ruling.” Further, even if the ruling is overturned, legal expenses will continue to run high at the company, playing a part in profits.
All in all, some on Wall Street believe Snyder is smart to play it safe when it comes to Qualcomm. Out of 20 analysts polled by TipRanks in the last 3 months, 10 are sidelined, 8 remain bullish and 2 are bearish on the stock. However, with a potential upside of nearly 15%, the stock’s consensus target price stands at $78.33. (See QCOM price targets and analyst ratings on TipRanks)