We downgrade our recommendation on Qualcomm Inc. (QCOM) to Neutral as we believe that the stock is currently fairly valued.
Why the Downgrade?
We downgrade Qualcomm primarily based on its current valuation, which is trading at the high-end of its 52-week price range. With respect to several valuation metrics, the stock is currently trading at significantly higher multiples compared with the S&P 500.
Moreover, we believe that aggressive competition in the mobile phone chipset market may hurt Qualcomm’s profits in the future. Competition is likely to emanate from formidable rivals like Broadcom Corp. (BRCM) and NVIDIA Corp. (NVDA), as well as from low-cost competitors like Mediatek of Taiwan and VIA Technologies of China.
Balanced View on Qualcomm
We believe that Qualcomm will continue to perform wellon the back of a significant surge in demand for smartphones and tablets. Management is quite confident that it willbe able to retainits current pace of revenue and earnings growth for at least the next five years. In our view, the long-term fundamentals of the company are intriguing given the growing demand for LTE-enabled mobile handsets in the U.S., Japan and South Korea.
Qualcomm has firmly established its leadership position in the high-end smartphone segment. The company has significantly benefited from the significant growth of 3G wireless technologies and smartphones in the emerging markets, China in particular.
The next-generation 4G Long Term Evolution (LTE) technology has also boosted Qualcomm’s market position. The company has become a major chipset vendor for global smartphone giants, namely Apple Inc. (AAPL), Samsung and HTC.
Nevertheless, the ongoing global economic volatility may severely impact the telecommunications industry, which in turn will negatively affect the demand for Qualcomm developed chipsets. Qualcomm’s future growth is dependent on the continuous deployment of CDMA/OFDMA based network technologies.
If the emerging markets fail to maintain the current run rate of installing high-speed 3G, next-generation 4G or any hybrid 3G-4G wireless networks, the demand for smartphones will decline, which will negatively affect Qualcomm’s financials.
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