Sell-Side Stays On Sidelines With Qualcomm, Awaits Resolution Of Licensing Disputes

Mobile chipmaker QUALCOMM, Inc. QCOM reported Wednesday after the market close with mixed quarterly results and in-line second-quarter guidance.

The Analysts

Bank of America Merrill Lynch analyst Tal Liani reiterated a Neutral rating on Qualcomm shares and lowered the price target from $67 to $60.

Morgan Stanley analyst James Faucette maintained an Equal-weight rating and $55 price target.

UBS analyst Timothy Arcuri maintained a Neutral rating and lowered the price target from $64 to $55.

Raymond James' Chris Caso reiterated an Outperform rating and lowered the price target from $75 to $65.

BofA: Qualcomm Could Weather Broader Sector Weakness

Notwithstanding the negative outlook for the semiconductor sector, Qualcomm stock is likely to find support from the company's repurchase program and a likely settlement of licensing disputes, Liani said in a Thursday note.

The analyst sees the company benefiting in the long-term from growing 3G/4G/5G smartphone/tablet and cellular machine-to-machine adoption worldwide.

The Qualcomm CDMA Technologies, or QCT, business is likely to benefit from smartphone upgrades and IoT, but the royalty rates from the Qualcomm Technology Licensing  unit will decline over time due to licensing disputes, Liani said. 

See also: Kerrisdale: Qualcomm Ruling Could Cut 'Stock Price In Half'

Morgan Stanley: Shares Rangebound Until Legal Issues Resolved

Qualcomm needs to prove the value of its non-essential IP in the courts, which could reduce the regulatory scrutiny of SEP pricing, Faucette said.

"We believe QCOM shares will remain rangebound until investors have better visibility into the ultimate outcome, even as the company demonstrates traction with 5G and increased content this year," the analyst said. 

Among the positives from the call are the additional interim payment Qualcomm is to receive from Huawei; a better-than-expected chip margin; and expectations of an increase in QCT revenue per MSM in the near term, Faucette said. 

Morgan Stanley sees a lack of success in leveraging non-essentials in licensing disputes and the lowered handset shipment outlook as negatives.

UBS: Improving Chip Story 

Qualcomm's results and guidance were not as bad as feared, due to QTL and the resumption of Huawei payments, Arcuri said.

These positives masked a $100-million deterioration in the core licensing business, leading to a reduction in UBS' valuation, the analyst said. 

"Fundamentally, QCOM remains at the nexus of the 5G transition and this comes to the fore this year as designs start to ramp and it can sweep in new content (RF); combined with other adjacencies, the chip story is fairly good."

Raymond James Sees Lower Core Sales Volume

Qualcomm labored to get to the consensus EPS estimate, but the underlying handset market is weaker, Arcuri said.

Due to the outstanding legal challenges, the shares have been trading more on their post-settlement earnings power and not near-term results, the analyst said. 

"We believe that earnings power remains at about a $6 level including the full buyback, our estimate of post-settlement payments from Apple and Huawei, reduced legal expenses and some 5G benefit in 2020."

Raymond James reduced its FY19 non-GAAP EPS estimate from $3.99 to $3.81 to reflect lower core sales volume, partially offset by the benefit from Huawei.

The Price Action

Qualcomm shares were up slightly at $49.55 at the time of publication Friday. 

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Photo courtesy of Qualcomm.