Qualcomm Legal Woes Take The Spotlight

Despite an earnings beat from QUALCOMM, Inc. QCOM, BMO’s Tim Long prefers to remain on the sidelines as he believes the stock will be range-bound given the legal overhangs.

The legal fight with Apple Inc. AAPL took the spotlight on the call and Long sees long-term risk to Qualcomm’s industry-high royalty rate. He expects shares to be weighed down by cases with Apple, FTC, KFTC, and EU.

“We do agree that AAPL's end game is to try to lower royalty rates using some common arguments, and QCOM has been adept at defending these. That said, we do see long-term risk to a royalty rate that is 5-10x anyone else's in the industry,” Long wrote in a note.

Meanwhile, the analyst pointed out that the lack of Apple “rebates” are not yet flowing through the income statement. Long noted that Qualcomm either understated the royalty rate by about 40 bps or the QCT operating margin by about 400 bps.

Qualcomm expects March-quarter revenue of $5.5-$6.3 billion and pro forma EPS of $1.15-1.25, versus consensus estimate of $5.9 billion and $1.19, respectively.

The company expects March quarter MSM shipments to be 165-185 million, and BMO estimate MSM shipments of 181 million in the quarter.

In addition, Long expects Qualcomm’s market share to be further pressured by vertical integration at Huawei and Samsung throughout 2017.

“We expect share to remain depressed and model QCOM capturing 48% of 3G/4G shipments in FY17,” Long added.

Long, who maintained his Market Perform rating on the shares, cut the price target by $7 to $60.

At last check, shares of Qualcomm fell 5.33 percent to $53.87.