Does Qualcomm's Break-Up Value Hint At Massive Upside?

• QUALCOMM, Inc. QCOM shares tanked this week after reports surfaced of a Korean antitrust probe.
• Bank of America believes that this probe will have a negligible impact on the company’s business.
• The firm models a sum-of-the part valuation of $65/share for Qualcomm.

Qualcomm shares plummeted more than 9.4 percent on Wednesday following news of a new Korean antitrust probe of the company. The decline leaves shares down 33.9 percent in 2015, but Bank of America analyst Tal Liana sees plenty of value to the stock at current levels.

Korea Ruling Is A Non-Factor

According to Liana, Qualcomm investors have nothing to fear from the Korean probe. He points out that, regardless of the outcome of the probe, the Korean market accounts for only about 0.6 percent of the company’s global unit market. More importantly, the US is not currently pursuing any antitrust actions against Qualcomm.

Break-Up valuation

Qualcomm has long been rumored to potentially split its Qualcomm Technology Licensing (QTL) business from its Qualcomm CDMA Technologies (QCT) business. Liana feels that breaking down the valuations of both segments reveals just how much value is currently stored in Qualcomm’s stock.

Bank of America’s valuation model, which includes an assumption that royalty rates over the next decade will decline from 3.1 percent to 2.2 percent, values QTL at $35-39 per share.

Using Intel Corporation INTC’s PE of 12x and Bank of America’s $1.50 per share annual earnings estimate for QCT, the firm derived a sum-of-the-parts valuation for Qualcomm of $65.

“We believe fair value is even higher and maintain our $75 PO,” Liana added.

Buy The Dips

In addition to an attractive valuation, Bank of America sees the potential for new deals in China, continued cost-cutting and strong traction for the company’s SD820 chip as potential positive catalysts ahead for Qualcomm. The firm maintains its Buy rating and believes investors should be loading up after the 2015 dip.

Disclosure: the author holds no position in the stocks mentioned.