Qualcomm shares tumbled on Wednesday after the chip maker’s board of directors announced its intention to stand firm against a spinoff despite pressure from an activist investor and antitrust probes. Following the selloff, JPMorgan analyst Rod Hall and his team upgraded Qualcomm stock but trimmed their price target.

Qualcomm, Inc. Upgraded But Price Target Cut

Qualcomm to Overweight

In a report dated Dec. 17, Hall said he has upgraded Qualcomm from Neutral to Overweight but cut his price target from $57.50 per share to $55 per share. He thinks that the pullback brought Qualcomm shares “materially below Bear case valuation levels.” He gives the chip maker’s CDMA Technologies business a value of $16 per share and its Technology Licensing arm a value of $25 per share. The company has cash of about $13 per share.

The JPMorgan team expects QCOM to make major changes in its CDMA business to diversify the segment’s revenue, moving it away from wireless while increasing its scale and cutting costs. They assume that the chip maker’s share at Samsung will fell to zero in fiscal 2016 from about 16% this year. This results in a hit of about 10 cents per share for the CDMA business, although he says this is conservative because Samsung may launch smartphones running on the new Snapdragon 820 chips (probably the Galaxy S7) in the near future.

Also he expects Qualcomm to look for merger and acquisition opportunities as a way to diversify the CDMA business. He believes a bigger deal would be better for the chip maker’s valuation, possible a purchase of NVIDIA, Microchip or NXP, which he sees as good strategic fits. He thinks the chip maker could even have the ability to gobble up a giant like Texas Instruments because he estimates its debt capacity at about $53 billion with the assumption that it can borrow at six times the CDMA group’s EBITDA. Qualcomm also has about $20 billion in cash it could add to the pile.

Valuing Qualcomm’s patents

As with any technology company, Qualcomm has a treasure trove of intellectual property, which the JPMorgan team valued by using data analytics to look for expirations on the company’s more than 2,000 essential patents. They believe that most of those patents will expire in 2031, so they have set their discounted cash flow to end in 2031 and are assuming that the patents have no value after that year. Even a terminal royalty rate of only 0.5% ups their valuation for the IP business to $26 per share.

Hall believes that much of the recent weakness in Qualcomm shares has been the result of concerns about royalties on chips as a result of the probes in Taiwan and Korea, but he thinks these concerns are overdone. In Korea, he thinks the issue about chip level licensing is such a big, complex one because of all the international parties involved, so any findings from the investigation could be years away. The investigation in Taiwan sounds similar, although the full details haven’t been released.

Qualcomm also faces problems in Europe

Recall that Qualcomm also faces problems in Europe, as the European Commission charged it with market abuse earlier this month. Regulators accuse the chip maker of abusing its position by offering incentives to device manufacturers that opt to use Qualcomm as their only supplier. They also allege that the company set prices unfairly below manufacturing costs in an attempt to force competitors out.

As of this writing, shares of QCOM were down 0.01% at $48.06 per share.

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