Contrarian investors should be wary of high optimism, not embrace it. That’s easier said than done, especially after Qualcomm (NASDAQ:QCOM) delivered decent quarterly results and published strong-looking guidance. The problem is that the market’s enthusiasm has, most likely, already been priced into Qualcomm stock.
Furthermore, as we’ll see, there’s been ultra-positive chatter in the financial media about Qualcomm’s artificial intelligence chips.
There’s no doubt that those chips will provide revenue for Qualcomm, but let’s not go overboard. All in all, it’s fine to be bullish about Qualcomm’s growth prospects, yet it’s not prudent to buy the shares at just any price.
Why Did Qualcomm Stock Jump Nearly 10%?
It was a banner day for Qualcomm’s long-term investors, to say the least. Qualcomm stock surged 9.74% to $180.10 on May 2, and it’s easy to pinpoint the catalyst.
Qualcomm had just released the financial data for the second quarter of fiscal 2024. Along with that, Qualcomm published current-quarter guidance that definitely kept the market in a good mood.
Here’s the rundown. In Q2 of FY2024, Qualcomm generated revenue of $9.4 billion, up 1% year over year; this result was in line with analysts’ consensus estimate. That’s nothing to write home about, but it gets better from here.
Next, Qualcomm reported quarterly adjusted earnings of $2.44 per share, beating Wall Street’s forecast of $2.33 per share. That’s a decent result, but by itself, it wouldn’t likely have been enough to prompt a nearly 10% single-day share-price rally.
What really caught investors’ attention was Qualcomm’s current-quarter guidance. The company forecast revenue of $8.8 billion to $9.6 billion, the midpoint of which is $9.2 billion; Wall Street had called for $9.1 billion.
Furthermore, Qualcomm guided for current-quarter adjusted earnings of $2.15 to $2.35 per share. The midpoint of that range is $2.25, and analysts had predicted earnings of $2.18 per share.
Qualcomm and Talk of a ‘Supercycle’
Qualcomm’s actual revenue data was only decent, not spectacular. Plus, the company’s earnings beat was pretty good, yet nothing to get super-excited about.
As a contrarian investor, I become wary when a stock surges mainly on optimistic forward guidance. The market is highly efficient and forward-looking, and it tends to price its high expectations into asset prices immediately.
Then, the company has the challenging task of meeting the market’s high expectations in order to justify the new, elevated share price. It’s a no-win scenario, in some cases, for investors who chase after the rally.
It’s even more off-putting for contrarians when pundits in the financial media start using hyped-up buzzwords. I immediately started to get “signs of a topping process” vibes when I viewed a Yahoo! Finance interview with Moor Insights & Strategy CEO Chief Analyst Patrick Moorhead.
Moorhead gushed about how Qualcomm’s new processors feature “supersized AI” capabilities. Moorhead is evidently “very optimistic” that a “supercycle” could emerge in the second half of 2024.
In the same interview segment, Rosenblatt Securities analyst Kevin Cassidy offered no resistance to the “supercycle” prediction. True contrarians should be concerned when there’s highly confident, ultra-bullish consensus like this.
Qualcomm Stock: Wait for a Better Price
The sharp Qualcomm share-price rally was based more on hope for the future than actual past results. That’s problematic, especially when forward-looking investors already priced in their future growth expectations for Qualcomm.
This doesn’t mean you have to cross Qualcomm off your watch list entirely. Just be patient and let the share price come down so you can get a better risk-to-reward balance.
Personally, I’d prefer to wait for Qualcomm stock to $150 before considering a long position. That way, I wouldn’t be a buyer/chaser during peak optimism.
On the date of publication, David Moadel 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.
