As with a great many firms,chipmaker Qualcomm (NASDAQ:QCOM) has found itself at the mercy of the coronavirus from China. Qualcomm stock has been on a rollercoaster ride since the start of the year as investors come to terms with the fact that the new virus will likely have an impact on China’s economy.
While the total impact that coronavirus will have on QCOM is unknown, management seems to be setting the bar relatively low to avoid investor disappointment. Does that mean now is a buying opportunity? It could. Here’s a look at how Qualcomm may behave over the next few months.
When Qualcomm released its fiscal-first quarter earnings earlier this month, they came with a host of warnings about future headwinds. Not least of which was a warning about how coronavirus could impact demand for chips as Chinese customers button down the hatches and wait for the virus to be contained. According to UBS, China’s consumers make up about a quarter of the world’s smartphone demand. Not to mention that Qualcomm has become a top suppler among Chinese phone makers.
That’s made investors understandably nervous. After all, news regarding the coronavirus so far isn’t promising. China’s Hubei reported the most coronavirus-related deaths in a single day on Friday with 242 reported deaths and 14,840 new patients. The total death toll is now at 1,355 and almost 60,000 people within China’s borders have tested positive for the new virus. With doctors and scientists still debating its origin and how to contain it, there’s some concern that we haven’t seen the worst of it yet.
It’s worth noting that coronavirus has officially surpassed SARs in terms of its global impact, so it’s difficult to gauge exactly how the market will respond based on past epidemics. However, in the case of SARs, stocks bottomed out three months after the outbreak and took an additional three months to make their way back to previous levels. That’s a useful timeline to keep in mind if you’re willing to accept that coronavirus’ impact could take more time to clear.
On Thursday, Qualcomm stock fell a further 1% in premarket trading as investors digested news about the elevated death toll in China. Still, the impact that the cornonavirus will have on the chipmaker has been more-or-less priced in at this point.
Qualcomm management has said their outlook is cautious, so it likely represents a worst-case scenario. According to the company’s finance chief Akash Palkhiwala, the firm has only seen orders decline slightly so far and cut the low end of its guidance as a cautionary measure.
Coronavirus isn’t the only potential headwind facing Qualcomm this year. The firm is also embroiled in a legal battle with Huawei over a licensing dispute that dates back to 2018. Back then, the Chinese tech firm agreed to pay quarterly installments to Qualcomm, but now that the contract has expired the two will have to work out another deal.
Plus, the European Union has accused Qualcomm of anti-competitive practices in the lead up to the region’s 5G roll out. Qualcomm said it was confident that it’s been operating within EU guidelines, but the ordeal could drag on in the months to come.
Plus, the trade war between the U.S. and China prompted Chinese phone-makers to find new domestic component suppliers which could impact Qualcomm negatively even as tensions between the two nations fades. Beijing is working to bolster its domestic chip market, which could cause Qualcomm’s Asia sales to slide significantly.
The legal issues that Qualcomm is facing with the EU and Huawei aren’t enough to derail the firm’s long-term growth story. Declining sales in China, however, could become a problem. The firm reported that its revenue from China was down more than 20% in 2019, likely a product of the trade war. Worryingly, Chinese sales make up nearly half of the firm’s overall gross sales. The coronavirus issues could further pressure Qualcomm’s Chinese sales.
But the situation in China — both the chip market and the coronavirus — is extremely fluid. Last year, the trade war complicated matters. But this year, it should become clearer as to exactly where Qualcomm stands in relation to its Chinese competition. As far as the coronavirus, while the rising death toll certainly isn’t something to take lightly, most agree that the impact it will have on economic growth will be temporary.
With that said, long-term investors comfortable with the risks associated with China could use Qualcomm’s current weakness to buy shares at a discount.
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