Qualcomm’s (NASDAQ: QCOM) 25% Drop Starts To Look Overdone

For a company that was hitting all-time highs less than two months ago, Qualcomm (NASDAQ: QCOM) has had to watch their shares take a fast escalator down recently. But it’s a testament to the stock’s extraordinary performance in 2020 that even with a 25% drop, shares are only back trading at November’s prices.

Still, it’s a dirty start to the year and reminiscent of a similar fall around the same time last year. For the bulls though, there’s some solace in the fact that most of the selling is contagion-related, as the tech sector finally takes a long-awaited breather. The main catalyst here is an uptick in interest rates, which themselves are a response to potentially higher than expected inflation. Higher rates hurt growth stocks, hence the weakness in tech right now.

Attractive Valuation

Qualcomm’s latest earnings report from February however, paints a picture of a company that has little to worry about. Even with a $150 billion market cap, they’re still reporting consistent revenue growth of more than 60% year on year. With the slide in shares since last month’s numbers, Qualcomm’s price-to-earnings (P/E) ratio is now close to 20, which means even the most pessimistic bear would have a hard time calling shares overvalued right now.

It’s this kind of thinking that has the folks over at Piper Sandler getting excited, as they upgraded shares from Neutral to Overweight last Thursday. In a note to clients, analyst Harsh Kumar pointed out the "compelling long-term entry point” that’s opening up, with the current pullback meaning shares are "trading at a 5-year low relative to the SOX on a P/E basis".

As far as tech goes, Qualcomm’s core business of semiconductors can be considered one of the more well developed and therefore more insulated from any market pullback. Compared the likes of high risk medical innovation companies or driverless vehicle stocks, there’s a proven product and market in place here. This, as well as the lower P/E ratio, should give those of us on the sidelines plenty to chew on.

As Kumar pointed out, there’s a strong case to be made for saying Qualcomm "is one of the cheapest in the large/mega cap semiconductors” space right now. A fresh and increased price target of $160 suggests upside of close to 25% from Friday’s closing price, and is largely based around strong growth projections in the core businesses this coming year.

Longer Term Potential

Barron's also highlighted the opportunity in Qualcomm last week. In an interview with David Katz from Matrix Asset Advisors', Katz highlighted the San Diego headquartered company as a good example of one that can balance dividend yields and valuation. Qualcomm is one of a few high-flying tech names that pays a noteworthy dividend, with the current yield of 2% looking particularly attractive now in the context of shares potentially being oversold.

It was the Oracle of Omaha who once said the time to buy is when there’s blood on the streets, and while we’re nowhere close to experiencing a selloff on the scale of last March (not yet anyway), Qualcomm is definitely on the ropes right now. But for those of us with a longer-term investment horizon and a belief that semiconductors have a huge role to play in the 21st century’s economy, you can’t really go wrong if you start building a position in Qualcomm at these levels. If the selloff in tech intensifies in coming weeks, all the better for those of us in the bull camp.