Up almost 2.5x since March, we believe Qualcomm stock (NASDAQ: QCOM) could see significant downside. Qualcomm stock is up almost 70% so far this year. It traded at $91 in February 2020 â€“ just before the outbreak of coronavirus â€“ and is currently 60% above that level, as well. Further, due to poor full-year 2020 results, and unlikely demand growth in the near to medium term, the stock has the potential to drop around 20% to levels below $120. Our conclusion is based on our comparative analysis of Qualcomm stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesnâ€™t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 67% from the lows seen on Mar 23, as the Fedâ€™s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here is how QCOM stock and the broader market fared during the 2007-08 crisis.
Timeline of 2007-08 Crisis
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- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
QCOM and S&P 500 Performance Over 2007-08 Financial Crisis
We see QCOM stock declined from levels of around $42 in October 2007 (pre-crisis peak) to levels of around $33 in March 2009 (as the markets bottomed out), implying QCOM stock lost 20% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of $46 in early 2010, rising by almost 40% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.
QCOM Fundamentals Over Recent Years
QCOM revenues remained flat, going from $23.6 billion in 2016 to $23.5 billion in 2020 (QCOMâ€™s fiscal year ends in September). Despite roughly flat revenues, earnings increased from $3.84 in 2016 to $4.58 in 2020, due to a lower effective tax rate.
Does QCOM Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
QCOMâ€™s total debt dropped from $2.5 billion in 2017 to $500 million in 2020, and its total cash also dropped from around $38.6 billion to $11.2 billion over the same period. Further, the company generated around $5.8 billion cash from operations in fiscal 2020. A strong cash cushion combined with a positive operating cash flow, provides the company a reasonable cushion to deal with the current crisis.
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
With the recent surge in the number of new Covid-19 cases in the U.S., and the impact on industrial and manufacturing activities, we expect chipset sales to struggle in the near term. This is evident from Qualcommâ€™s Q4 results, where revenue for 2020 came in at $23.5 billion, down from $24.3 billion in 2019. Operating margins took a bigger hit, coming in at 26.6% in 2020 vs 31.6% in 2019. We believe that Qualcomm stock has significant potential downside in the near term, and even as the lockdowns are gradually lifted, revenues will stay weak in the near to medium term. This could see QCOM stock potentially drop 20% from its current level
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