We downgrade our recommendation on Qualcomm Inc. (QCOM) to Neutral based on two reasons: (1) high-level of current valuation and (2) 28 nanometer chipset supply shortage problem, which the company will face for the rest of fiscal 2012. Although we believe the chipset supply problem with the Taiwanese vendor is a temporary phenomenon, further delay to resolve this issue may significantly affect Qualcomm’s revenue in fiscal 2013.
Meanwhile, the stock price has soared over 36% in the last year and currently trading at the high-end of its 52-week price range. We believe Qualcomm is fairly valued at this stage. Nevertheless, the company continues its dream performances as its second quarter of fiscal 2012 results significantly outpaced the Zacks Consensus Estimates. Management is confident that it will be able to maintain its current pace of top- and bottom-line growth for at least the next five years.
Qualcomm remains a beneficiary due to the significant growth of 3G wireless technologies and smartphones in the emerging markets, particularly in China. Globally, approximately 85% of wireless networks at present support 3G technologies. According to Wireless Intelligence reports, more than 1.5 billion 3G subscribers will be added in these regions by 2015. The next-generation super-fast 4G Long Term Evolution (LTE) technology has also boosted Qualcomm. The growing acceptance of LTE technology has prompted the mobile handset manufacturers to develop phones that will be compatible with this network.
Qualcomm has firmly established its leadership position in the high-end smartphone segment. Apple Inc.’s (AAPL) upcoming iPhone 5 and iPAD 3 may become potential growth drivers for the company in the near future. In addition, Qualcomm received a shot in its arm from the upcoming Windows 8 operating system of Microsoft Corp. (MSFT). The two entities are collaborating to develop chipsets from Snapdragon platform for notebook and tablets that will use Windows 8 operating system. Snapdragon also supports Windows Phone 7 operating system. Qualcomm will become the sole chipset developer for both Windows smartphones and Windows notebooks.
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