Jefferies analysts Peter Misek, Jason North and Billy Kim rate Qualcomm, Inc. (NASDAQ:QCOM) as a Buy as they contemplate the long and short term impact the MWC announcements will have on the company.

Qualcomm Logo

We believe MediaTek Inc. (TPE:2454)’s recent announcements at MWC may be more of a medium to long-term threat to Qualcomm, Inc. (NASDAQ:QCOM) and will have little near-term impact. The high-end smartphone market is saturated and while we believe that pricing and subsidy pressure will become more severe globally, Qualcomm has significant opportunities through integration, iPhone 6, and royalty collections in China. The company also increased its dividends and buybacks as we expected.

MediaTek unlikely to pose a threat until later in 2015

The 64-bit integrated die solution Qualcomm, Inc. (NASDAQ:QCOM) is now offering will be matched according to MediaTek Inc. (TPE:2454) by the end of 2014. We believe that a more practical launch for inclusion into shipping models is 2H15. MediaTek announced the MT6732 at MWC, a new single-die integrated 8-core SoC for the mid-market.

Qualcomm’s long-term integration roadmap

We believe integration will be required as content dollars will keep shifting with the emergence of specialty processors and features. At the same time, we believe Qualcomm is on a very quick integration roadmap where increasing die encapsulation is occurring. We believe increasing die encapsulation means that more RF and power amp capabilities will be incorporated. Longer-term, we believe Qualcomm, Inc. (NASDAQ:QCOM) will launch SoCs where co-processors (e.g. Apple’s M7) are located on the same socket.

Some royalties related to China Mobile expected this year

We believe royalties for China Mobile related handsets such as the iPhone 5s will begin to trickle in this year. We expect Qualcomm, Inc. (NASDAQ:QCOM) will see more significant royalty collections in China in FY15 with the launch of iPhone 6 and other devices. We believe Qualcomm will benefit significantly from the TDSCDMA to TD-LTE transition as the company collects minimal TD-SCDMA royalties.

iPhone 6 discrete WLAN socket win likely for Qualcomm

We now believe it is more likely for Qualcomm, Inc. (NASDAQ:QCOM) to win the discrete WLAN socket for the iPhone 6s. While an integrated modem/WLAN chip might save ~$3/iPhone, we believe Apple remains status quo on the iPhone 6’s WLAN socket due to more pressing challenges with the display. We believe Street consensus numbers had not incorporated a win in the iPhone 6 and a win in the 6s is still a significant opportunity.

Valuation/Risks for Qualcomm

Our target of $86 is based on a DCF and a P/E of 15x, slightly below the peers’ 16x mean but skewed more toward the QCT mean of 14x. Risks: 1) LTE competition; 2) Smartphone pricing and slowing growth; 3) Lower royalties for VoLTE.