I love Qualcomm (NASDAQ:QCOM). Based in San Diego, Qualcomm develops and commercializes a range of foundational technologies for the wireless industry. With mobile connectivity becoming an increasingly vital concept, the company’s specialized semiconductor products command tremendous prominence. However, as great as Qualcomm stock is, the market is the ultimate arbiter.
Right now, the market is saying it’s not comfortable with QCOM’s premium to growth. Last Friday, Qualcomm stock suffered a loss of nearly 3%. For the business week ending July 19, the equity incurred a hit of more than 8%. And in the trailing month, shares have slipped over 12%.
Qualcomm stock currently trades at a sales multiple of 5.76X. During the first quarter of 2023 to Q1 2024, this metric sat at 3.94X. That’s one possible clue that QCOM still has further to drop. As relevant as the underlying business is, the market does not seem to appreciate a revenue multiple beyond 5X.
Once the company falls to a more palatable premium, it could be game on. Qualcomm is one of the leaders in energy-efficient artificial intelligence. That’s going to be a powerful catalyst. However, the price needs to be right. For Qualcomm stock, that could be $140 a share.
Qualcomm Stock Valuation Needs to Make Sense
As stated earlier, the market is the ultimate arbiter. It doesn’t matter what we think about the investment or how an opportunity could be grossly undervalued. If the collective trading determines that an equity needs to be downgraded, guess what? It’s going to be downgraded. Therefore, Qualcomm stock faces some turbulent weather ahead.
Even with the sizable drop in QCOM stock recently, at 5.76X, it still caries a hefty multiple compared to prior averages. Even when projecting out to the end of the year, QCOM is still overpriced. For example, analysts believe that the underlying company will post revenue of $38.39 million for fiscal 2024. Assuming a shares outstanding count of 1.12 billion, QCOM would trade at 5.43X revenue.
Frankly, that’s not much of a discount. Now, to be fair, since Q2 2022, Qualcomm has only missed consensus quarterly sales targets twice. The last miss occurred in Q3 of last year and it was a small one. Therefore, it’s possible the company could hit the upper range of the estimate spectrum. But even at $40.4 billion, the multiple for Qualcomm stock would only decline to 5.16X.
Here’s the thing: QCOM is obviously a mature tech enterprise. So, it’s unlikely to have gargantuan gains in revenue. It’s no longer a cool, sexy startup. So, for QCOM stock to enjoy a more reasonable valuation — somewhere around the 3.94X it saw last year — the share price would likely need to come down significantly.
We’re talking around $140. Assuming the tech giant can also post sales near the most bullish end for fiscal 2024, QCOM would be at a very attractive level.
Technical Analysis Supports the Case for $140
At first glance, investors may balk at the idea that Qualcomm stock would drop that low. After all, its 200-day moving average — one of the leading gauges for intermediate-term stability — sits at $158.22. A price tag of $140 would imply almost a 12% discount to the 200 DMA.
That sounds ridiculous until you consider the fact that the July 17 session gapped down below the 50 DMA. The price action didn’t even bother to bound around the 50 DMA as a technical support line. No, it just opened below this gauge of near-term health. In other words, the market simply does not accept Qualcomm stock at a 5X premium to sales or more.
What’s really interesting is the $140 level represented a key support line between late December 2023 to early February 2024. In addition, it imposed upside resistance between April 2022 through July of that year.
It’s a very significant level so it only makes sense that QCOM stock may revert back to this point. Again, the market simply feels comfortable here.
To be clear, this doesn’t mean that Qualcomm stock is destined to stick permanently at $140. Rather, I anticipate the underlying company to gather fundamental strength in areas such as energy-efficient AI processors and other high-value innovations before storming higher again.
The Takeaway: Wait for a Better Deal on QCOM Stock
Ask any investor with knowledge about tech and chances are that person will have good things to say about Qualcomm stock. It’s a powerhouse asset tied to one of the most innovative firms in the world. However, innovation, no matter how powerful, has a price. It’s your job to pay the best price possible. Given the financial and technical dynamics, QCOM may fall to $140. That’s where the market appears to be most comfortable.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.