1 Semiconductor Stock To Buy on the Dip

Like practically every other stock, Qualcomm (NASDAQ:QCOM) share price dropped fast on March 20, 2020, as investors realized that COVID-19 would change the world in unexpected ways.
The prior January, the stock had reached a high of $95.91. Yet by March 20, the stock had fallen to $60.91. But it didn’t stay there for long.
QCOM share price quickly recovered and soon climbed beyond its former highs. On the final trading day of 2020, shares traded for $152.34.

2021 was a strong year for Qualcomm, with shares trading between $125 and $185. More recently, Qualcomm has slipped and nearly reached the lowest point of 2021. And unfortunately for existing shareholders, it looks like Qualcomm is riding a downward trend that could continue for the foreseeable future.
But is the dip worth buying?

The Bull Case for Qualcomm

Qualcomm has been instrumental in semiconductor manufacturing for decades. Most recently, the company has thrived by developing parts needed for 5G wireless equipment, including smartphones and IoT devices. As more companies switch to 5G standards to make data streaming faster and more reliable, Qualcomm has generated stellar revenues.
Recently, Qualcomm released financials for Q2 2022 showing that the quarter generated 41% more revenues than those reported in Q2 2021.
Net income grew by 67% and diluted earnings per share (EPS) by 68%.

Most of Qualcomm’s recent revenue has come from selling chips to smartphone manufacturers. It’s important to remember, though, that it has plenty of other buyers eager to update their technology. For example, several companies in the automotive industry integrate IoT technology into their vehicles to stay current with competitors and consumer demand.
If you want to sell a luxury vehicle, IoT features that cooperate with the driver’s smart devices, including their phones, home security systems, video cameras, and entertainment players are a must. The average buyer might not want to pay for these luxuries. Those with the funds and interest, however, will help fuel Qualcomm’s ongoing success.
Moreover, Qualcomm has one of the largest and most dependable royalty streams of any company stemming from its massive patent hoard. 
It’s clear the combination of patent royalties and growth vectors from new consumer applications has spiked revenues, which grew 42.6 in 2021 vs a 3.1% decline in 2020 and a modest 7.4% in 2019.
Operating income is impressive, coming in just south of $10 billion at $9.7 billion in 2021 vs $6.2 billion in 2020, a year over year decline from 2019’s $8.0 billion.
So with revenues and operating income soaring, what should investors worry about?

The Bear Case Against Qualcomm

Qualcomm’s slipping stock price shows that plenty of investors believe the recent revenue growth is a bright event that will be left in the past and the future is more gloomy.
Some investors are selling shares because they worry that higher inflation will make it harder for people to buy consumer electronics. Many analysts are speculating that a worldwide recession is coming, making it nearly impossible for companies like Qualcomm to succeed.
The hike in interest rates by the Federal Reserve is also adding to the concerns over consumers’ capacity to pay for discretionary goods that feature Qualcomm chips.
Some of the economic policies put in place to protect businesses and consumers might be causing problems, too. When the U.S. handed out relief checks in 2020 and 2021, it intended the payments to support the economy.
Unfortunately, the pandemic has outlasted the positive influence of stimulus payments, and the government has no plans to issue similar support. The political will has disappeared and some worry that the payments themselves may have actually damaged the economy.

Is Qualcomm Positioned for a Rebound?

Yes, there are reasons to worry that the economy could prevent Qualcomm from reaching its short-term goals. If consumers truly don’t have enough money to buy new smartphones, vehicles, and other goods, the company’s revenues will almost certainly be impacted this fiscal year.
That’s not necessarily the worst news for investors willing to take a long-term perspective, though. If Qualcomm’s price slips for a few more months, it could create a new opportunity for buyers to grab shares at a discount. It might take some time, but Qualcomm has high odds of rebounding. Its market position makes it essential to the success of several other global brands.
Indeed on a valuation basis, Qualcomm is compelling. Running a discounted cash flow forecast analysis reveals a fair market value of $185.94 per share, which would translate to 41.5% upside based on current levels.
The question, therefore, isn’t whether you should buy Qualcomm on the dip. Evidence suggests that you should. It’s timing that will determine how much money investors make from the shares.
If you already own shares in Qualcomm, it probably makes sense to hold them and see what the future brings. If you don’t own shares, pay close attention to fluctuations in the stock price and overall market to determine what price reaps the best returns. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.