Qualcomm, Inc. (QCOM): Grace Under Fire

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Nomura Global Markets Research analysts Romit Shah, Sanjay Chaurasia and Sidney Ho rate Qualcomm, Inc. (NASDAQ:QCOM) as a Buy as the estimates still appear achievable.

We expect shares of Qualcomm, Inc. (NASDAQ:QCOM) to be under pressure following weak guidance from Apple (covered by Stuart Jeffrey). iPhone unit shipments of 51m were below consensus of 55m. In addition, Apple Inc. (NASDAQ:AAPL) guided Q1 revenues down 26%, which implies iPhone units of less than 40m (vs cons of 45m).

iPhone sales volume weakens Qualcomm estimates

While iPhone volumes missed, we believe the weakness is largely reflected in estimates for Qualcomm, Inc. (NASDAQ:QCOM). The company guided Q4 chipset shipments (MSM) up 7% qoq to 203m, well below iPhone shipment growth of 51% and the overall smartphone market that we believe grew 14% in Q4.

For Q1, iPhone shipment declining 20-25% at first blush would suggest that our estimate of 195m MSMs (-4%) is materially at risk. However, we would highlight that iPhone shipments were similarly weak in Q1-13 (-22%) and yet MSMs declined only 5% qoq.

As such, our expectation is that MSM guidance comes in between 190- 195m (-4 to -6%) in March, thus bracketing our current estimate of 195m. We are forecasting total QCT revenue of $4.55b in Q4 and $4.3b in Q1.

Qualcomm’s royalty business modest

In addition, we believe that the royalty business (QTL) could show some modest upside in Dec. We are forecasting QTL revenues up 3% to $1.9b; however, we believe the total handset market grew 4-5% in the prior period. Overall, we are forecasting revenues of $6.62b (+2%) in Dec and $6.75b (+2%) in Mar, versus consensus of $6.68b and $6.68b, respectively.

We remain positive on Qualcomm, Inc. (NASDAQ:QCOM) and see weakness as an enhanced opportunity to accumulate shares. We expect earnings growth to accelerate throughout the remainder of the year, driven by new product launches (S5, iPhone 6), TD-LTE in China (coverage moving from 16 to over 300 cities), higher QCT margins (17.5% in March to 22.5% in Dec), and more favorable comps.

In addition, planned buybacks of $4b will provide incremental leverage. The company has significant repurchasing power with $30b in cash.

Qualcomm’s valuation

We are forecasting EPS to accelerate from $1.20 in Dec (-5% yoy) to $1.38 in Sept (+32% yoy).The stock is currently trading at 15x CY14E earnings EPS of $4.92 ($5.46 with options), which is in-line with the S&P 500 and below an average premium of 25% over the last five years. Our price target of $85 is based on a multiple of 17x 2014 EPS. We estimate net cash of $18 per share.

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