Despite QCOM’s near monopoly in wireless chips, strong balance sheet, commitment to cash return and reasonable valuation relative to expected growth, the stock has become mildly controversial among the sell side analyst community. This past Friday, Goldman Sachs and Credit Suisse weighed in on the stock prior to next week’s July 23rd fiscal Q3 results. Below is a rundown of the two firms’ analysis about smartphone demand in the next couple quarters. While Goldman believes there are a few factors that could cause demand headwinds, they still believe that the stock is cheap at 15x next year’s expected earnings:
Credit Suisse on the other hand notes that they have anticipated high end smartphone demand deceleration but they look to China for market-share gains:
While GS took the stock off of their Conviction buy list the stock remains a Buy with a 12 month price target of $95, while CS rates the stock a buy with a target of $85. The street as a whole remains overwhelmingly bullish with 35 Buys, 9 Holds and only 2 Sells with an avg 12 month price target of $86, or about 8% higher than where the stock is currently trading. Despite the bullish stance by the sell side, investors seem to be a tad more guarded with the stock sorely lagging the Semiconductor Index ytd which is up 21% compared to QCOM’s 7% gains.
Since offering downbeat guidance for the current quarter in late April, the stock has been in a bit of a funk, trading in a fairly tight range between $78 and $81:
While large cap tech continues to party, QCOM has seriously lagged on a relative basis in the near term and looks poised to make a move one way or the other. In early June we attempted to play QCOM for a catch-up trade into this qtr’s print, but pulled the plug after a few weeks (here) as it became clear that the stock just didn’t have it. Since then, INTC has pre-announced a better than expected Q2, but given their exposure to PCs, there was little positive read-through for QCOM.
The implied move in the options market for QCOM appears cheap at only about 3.3%, which is almost exactly the 4 qtr avg move. For most large cap stocks like QCOM with a market cap north of $125 billion with massive cash balance, buybacks and dividends, large out-sized moves are low probability events for the most part. However, the stock’s under-performance could have investors off sides, raising the likelihood for a breakout on a beat and raise. On the flip side, it appears that investors are already reflecting a bit of skepticism which could discount the chances for a big move to the downside on a disappointment.