Qualcomm Upgraded To Overweight At Morgan Stanley, Firm Sees Multiple 'Upside Drivers'

In a report published Monday, Morgan Stanley analyst James E Faucette upgraded the rating on

from Equal-Weight to Overweight, while maintaining the price target at $75. Analyst James Faucette believes the market has turned "too pessimistic" on Qualcomm, assuming that the recent "share loss foretells a permanent decline." "We see sources of upside for QCOM from new product releases, improving industry structure/conditions, and cost cutting/capital return moves," Faucette added. Pointing out that the recent developments in the industry had reduced the risk associated with the magnitude of cost cuts undertaken and targeted by Qualcomm, the Morgan Stanley report mentioned, "In particular, we view as beneficial Intel's stated move to slow the cadence of semiconductor geometries while reducing investment." "Further, we think flat to falling handset industry profits reduce the risk of increased baseband & application processor development efforts by Qualcomm's customer base," Faucette wrote. Better-than-expected chip shipments in the September quarter, reduced COGS on production shift to new foundry partners; the closing of the CSR acquisition, which is expected to be accretive to FY16 results; and improved royalty capture in China on new licensing agreements are the major factors that can drive Qualcomm to perform better in the future. Market concerns surrounding the sustainability of Qualcomm's royalty stream is unwarranted, the report stated, while adding, "Investors seem most concerned about the potential for reduced royalty rates for 4G- & 5G-only products. These devices may carry a lower royalty rate, but if they include 3G connectivity, we believe Qualcomm is entitled to collect the full 3G royalty rate."