Oppenheimer: Why We're Downgrading Qualcomm

Oppenheimer's Rick Schafer downgraded the rating on QUALCOMM, Inc. QCOM from Outperform to Perform.

Schafer mentioned that the stock has struggled over the last two years, dropping more than a third from the highs seen in mid-2014, driven by the ongoing structural issues at QCT and QTL.

Sentiment on the stock at present appears to be at its lowest, the analyst pointed out, while stating that while the share price might be cheap, the company has a solid balance sheet and robust capital return.

"A lack of tangible catalysts likely keeps a lid on shares for the foreseeable. With risk/reward in balance, we are stepping to the sidelines here," Schafer explained.

Related Link: Is Qualcomm A Value Stock Or Value Trap?

Management intends to cut QCT costs by $1.4 billion by FY17, while leveraging its core mobile IP into adjacent markets. These initiatives are likely to expand the business' SAM by $100 billion by 2020 and boost the EBIT margin to 20 percent.

Qualcomm guided to WTL revenue of $10 billion in FY20, from $7.7 billion in FY17, driven by annual TAM growth of 5-7 percent and improved compliance in China. However, Schafer expects ASPs and royalty to remain under pressure.

"We see M&A as QCOM's best option to diversify into stickier, higher profit markets," Schafer said, while adding that "the opportunity exists to take a more aggressive stance toward "gamechanging" M&A."

The CY16 and CY17 revenue estimates have been raised, while the EPS estimates have been lowered.

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Posted In: Analyst ColorDowngradesAnalyst RatingsTechOppenheimerRick Schafer
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