Is It Finally Time To Buy Qualcomm Stock?

  • Qualcomm stock has been rallying over the past one week.
  • The rally has mainly been triggered because Wall Street analysts feel that the stock has limited downside now.
  • Is it finally time to buy the Qualcomm stock now?

Shares of Wireless chip giant Qualcomm (NASDAQ:QCOM) have shot up more than 10% over the past 5 days partly due to the broad market rally and partly due to positive developments by the company.
 
 
 

Qualcomm 5-Day Share Returns

QCOM-2

Source: CNN Money

The first major rally appears to have been triggered by comments by Bernstein's Stacy Rasgon who thinks that Qualcomm stock has been depressed for too long and could rally at the slightest whiff of good news:

"In the current environment, with uncertainty abounding in semis, it may be time to rotate into something that has been suffering under such headwinds for some time, and as a result may provide a shelter for limited downside, and with very low expectations providing an outlet for upside,"

Ragson says that a simple catalyst such as a positive earnings call without a guide-down could do the trick for the Qualcomm stock. Other notable takeaways from the bullish call were that the market is currently expecting Qualcomm’s royalty rate on 3G/4G devices to decline from the 2015 average of 3.17% to just 2.4% in 2016. The market is also projecting a very bearish scenario for Qualcomm’s mobile chip segment, QCT (Qualcomm CDMA Technology) where operating margins will decline to 10% over the long haul and eventually enter red territory terminally.

Regarding the looming investigations by Korean regulators into Qualcomm’s IP licensing practices in the country, Ragson says the situation is not quite as dire since the investigations won’t cover the touchy subject of the magnitude of Qualcomm’s royalty rates and whether these are fair or otherwise. Ragson says that once Qualcomm gets cleared by the Korean authorities the company won’t have to worry about getting probed for its IP licensing practices till 2022 when Qualcomm’s licensing deal with Nokia (NYSE:NOK) ends. Qualcomm was fined close to $1B by Chinese authorities in early 2015 due to monopolistic practices in the country.

Meanwhile, Qualcomm has announced that it has signed a 3G/4G licensing deal with Lenovo, the fourth largest global smartphone manufacturer with a 5.2% market share. The licensing deal covers 3G and 4G OEM phone sales in China, and its royalty terms are consistent with those that Qualcomm agreed upon with antitrust regulators in China.

The Lenovo deal followed two other such deals that Qualcomm signed with Xiaomi and ZTE, two of the largest smartphone OEMs in China. The deal is highly significant for Qualcomm not only because the Chinese company is one of the largest globally, but also because it’s one of the few whose smartphone shipments are still growing at a healthy clip. Lenovo reported smartphone shipments of 74M during Q4 2015, up 24.5%. The three leading smartphone manufacturers Samsung Electronics (OTC:SSNLF), Apple (NASDAQ:AAPL), and Huawei only reported modest growth during the same period.

Qualcomm May Not Be Out Of The Woods, Yet

Despite the bullish call by Bernstein, Qualcomm is not out of the woods yet. While Ragson’s comments about the market being overly bearish about Qualcomm’s long-term prospects are spot on, there are still some nagging concerns about the near-term prospects for the company. For instance, Ragson says the market is projecting Qualcomm’s royalty rates on 3G/4G devices to fall to 2.4% in 2016 after averaging 3.17% in 2015. That, in turn, means that Qualcomm would end up collecting 24% less royalty in 2016 assuming device sales remain flat; a pretty dramatic decline.

QTL (Qualcomm Technology Licensing) worries by the market seem to be well supported by Qualcomm’s latest set of results where revenue for the segment fell 12% Y/Y to $1,607M despite an 8% growth in 3G/4G device sales. Qualcomm reported that device ASP declined just 1% to $193-$199 which implies that most of the revenue decline in the segment was orchestrated by a decline in royalty rates. Qualcomm estimates that it sold 307M-311M 3G/4G devices during the quarter, which in turn implies that the company collected ~$5.20 per device, working out to a royalty rate of just 2.65%.

To be fair, part of the revenue decline was caused by a $100M deferral in revenue from LG due to an ongoing royalty dispute. It’s not clear if Qualcomm reported the number of devices sold by LG in its device sales estimate. Assuming it included LG device sales in its estimate but deferred the revenue, the company’s royalty rate climbs to 2.81%, which still works out to an 11.4% decline compared to the 2015 average. That tells you that Qualcomm could be charging much less royalty on 3G/4G devices than it previously did, perhaps in a bid to get more OEMs on board.

Qualcomm is certainly making good progress with Chinese OEMs. China remains Qualcomm’s biggest market, and the unwillingness of smartphone manufacturers in this market to pay royalties, as well as rampant under-reporting of device sales has been taking a heavy toll on Qualcomm’s business. Qualcomm has now managed to sign licensing deals with the five largest Chinese smartphone OEMs including Xiaomi, Huawei, ZTE, Lenovo, and TCL. The Lenovo deal certainly could make a difference for the company. But given the huge double-digit revenue declines for QCT and QTL Qualcomm has projected during the current quarter, it might take several more quarters before all the latest deals begin to show on the company’s top line.

Is it time to buy Qualcomm stock? As things currently stand there is a lot of pessimism that has been baked into Qualcomm stock. The stock is still down 30.4% over the past 12 months and as Ragson correctly observed, any positive catalysts from here could lift the stock further. Meanwhile, there does not seem to be any major risk that could drag down the stock. So investors can buy Qualcomm shares now for the long haul.

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