Why Nomura Just Cut QUALCOMM To Neutral After Reporting Earnings

• QUALCOMM, Inc. QCOM has seen a 28.67 percent decline in its share price year to date, from $74.33 on December 31, 2014.
• Nomura’s Romit Shah has downgraded the rating on the company from Buy to Neutral, while lowering the price target from $75 to $80.
• Following patent-related disputes being resolved in favor of the company across India, Japan, Korea and Europe, Shah had expected a similar outcome for the China NDRC in February.

Analyst Romit Shah mentioned that Qualcomm had indicated that “slower than expected progress in signing up new licensees on 3-mode devices sold in China.”

On the other hand, current licensees have been withholding payments, with new contracts being negotiated. “Furthermore, Chinese OEMs are gaining share around the globe, which means Qualcomm’s addressable TAM isn’t growing as fast as the overall smartphone market,” Shah stated.

Shah expects the uncertainty regarding collections in China to persist, which indicates that “China’s leadership is not enforcing government-approved licensing terms to current and future licensees of Qualcomm’s technology.”

Shah believes that this also suggests an “ideological objection” to the company’s “unique” licensing model, “as baseband chipsets decline as a percentage of total construction costs.”

However, this makes assigning a value to Licensing challenging, although the segment accounts for more than two-thirds of the company’s profits.