Qualcomm's Stock May Drop 11% After Recent Rise

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Qualcomm Inc.'s (QCOM) stock has rocketed higher, with the shares of the chipmaker rising by more than 40% since the end of April. But now, the technical chart is suggesting the stock gives back a part of its recent gains and falls by roughly 11% from its current price of approximately $69.75.

It was last week that options traders were betting Qualcomm's stock would rise to $71 by the middle of October. But, a week later on August 28, the stock reached a price of $70.50 after the company completed the purchase of $10 billion worth of stock through a tender offer. The stock may have risen too fast. (For more, see also: Qualcomm's Stock May Rise 8% on Improving Profits.)

QCOM data by YCharts

Hitting Resistance

The technical chart suggests that shares may be due for a pullback and drop to $62.25. The stock has been trading in a range of approximately $50 to $70 since the beginning of 2016. Currently, shares are trading at the upper end of that range. The previous two times the stock reached the high end of the range, shares fell back to $50 in each occurrence. This time may be different. There is a level of technical support in the chart. It suggests shares could first make a stop at $62.25, about 11% lower than its current price of $70.

Overbought

Another warning sign is that the relative strength index (RSI) hit its highest level since November of 2017. The RSI is currently well above overbought levels at more than 80. When the RSI rises above 70, a stock is overbought.

Expensive

The stock is also currently expensive trading at almost 16 times 2019 earnings estimates. That places the P/E ratio at the higher end of its historical range going back to the year 2014. (For more, see also: The Future of Qualcomm's Stock.)

Fundamental Chart data by YCharts

May Only Be Short-Term

But, the good news for Qualcomm is that a pullback may only prove to be short term. That's because earnings growth is improving, with analysts boosting their earnings estimates as a result of the share repurchase.

Qualcomm's stock may be ahead of itself for the time being, and a pullback or even a period of sideways consolidation may be a welcome sign at this point. It would give the stock a chance to cool off, and may set up a longer-term move higher should those underlying fundamentals continue to improve.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.