In this report BMO Capital analysts take a deeper look at the importance of China on QUALCOMM, Inc. (NASDAQ:QCOM)’s business. Analysts’ view is that the risk from the potential legal action and the move to LTE is lower than investors think.
(1) The “at risk” portion of China revenues is lower. While the fiscal 2013 10-k mentions China as 50% of revenues, they believe the bulk of this comes from Apple/Foxconn and multinational OEMs exporting phones that were made in China. Analysts estimate the exposure to Chinese OEMs at only 10% of total revenues split between royalties and chips. (2) Analysts estimate that about 50% of TD-SCDMA units did not pay a royalty in FY 2013, and QUALCOMM, Inc. (NASDAQ:QCOM) lost $0.10 in EPS as a result, a 2% hit. (3) They estimate 75% of TDLTE phones will pay a royalty as the 5-mode devices that include WCDMA and FDD LTE do not seem to be at risk. (4) Analysts’ estimate is that QUALCOMM, Inc. (NASDAQ:QCOM) management is embedding less than $0.05 in its FY 2014 EPS guidance of $5.00-$5.20 for TD-LTE. (5) There is still a lot of growth in the China market for all three technologies. Only 35% of subscribers in China are on 3G devices. (6) They believe domestic market share in China is and will continue to consolidate around larger players with global aspirations.
Impact & Analysis
Neutral/Positive. Analysts have little insight to what the outcome of the NDRC investigation will be. There could be a fine, a negotiated royalty rate for all Chinese companies, or some other agreement. Either way, they believe China, even with its growth prospects, is less important than most think. The global move to 3G/4G, increased connectivity of other devices, and increase content per phone are more important value drivers for the stock.
Qualcomm’s Valuation
Analsts are reiterating their Outperform rating and price target of $86 for QUALCOMM, Inc. (NASDAQ:QCOM), which assumes the stock trades to a P/E multiple of 15x firm’s FY2015 estimate.
