Time to Be Cautious on Qualcomm as Investors Bail
News of a deal for Qualcomm to acquire Intel has received a tepid welcome on Wall Street.
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Intel INTC and Qualcomm QCOM continued to dominate the news on Monday, with talk of Qualcomm approaching Intel about a potential takeover received a tepid welcome from Wall Street.
Qualcomm has twice the market cap of Intel, and despite strong net income and solid cash on the balance sheet, swallowing Intel would still be a major undertaking. Intel brings with it some recent struggles and about 125,000 employees.
Chatter spread to names like Broadcom AVGO to scoop up pieces of Intel should the Qualcomm chatter fizzle or Intel flat-out reject an approach. Additional talk included a large capital infusion from private equity. While nothing is concrete, where there is smoke, there is usually fire.
I do expect something to develop over the next few months; however, outside of a cash infusion, I do not expect anything to close quickly. These are huge moving trains, so nothing changes directions or stops and reverses course quickly.
The bigger concern may not be Qualcomm buying Intel but investors bailing in anticipation that the deal, or any deal, could happen and dilute the stock. That preemptive selling has created a loss of momentum for the stock and created a bearish price pattern.
After climbing higher the past two weeks, Qualcomm broke down Friday when the news it had approached Intel hit the wires. Yesterday, we saw additional selling pressure, resulting in the stock closing below both its 10-day and 21-day exponential moving averages (EMAs). Shares have struggled when trading below these two moving averages, so it is worth noting.
The price breakdown on Monday creates the risk of a bearish cup-and-handle pattern. I would use a close below $157.50 as a hard stop, although if I wanted to enter, I would rather wait for a close above $175. The potential downside is $142.50 on a close below $157.50, although I expect $150 to be tested if we fail to recapture $172.50 by the end of the week.
I’m not bearish on QCOM long-term, but "cautious" is the word I would use to describe my short-term view.
At the time of publication, Byrne had no positions in any securities mentioned.
