3 Negative Catalysts In Qualcomm's Future

Negative Catalysts

Following are the brokerage's three upcoming negative catalysts:

• "We expect a meaningful guide down for the September quarter, mostly in the licensing business."
• "We believe management guidance for 3G/4G unit growth this year is too aggressive at 5–11 percent, which is well above our 2 percent view."
• "Following two years where chip market share fell by 900 bp each year, we expect further losses in FY 2017."

Citing the above negative catalysts, the brokerage has downgraded the stock to Underperform from Market Perform.

Further Justification, Estimates

BMO's EPS estimate of $0.99 for September quarter is below consensus of $1.09, and the fiscal year 2017 EPS view of $4.44 also came in below consensus of $4.67.

Related Link: Qualcomm Dividend Payout Is Higher Than 5-Year Average Payout

"We expect the stock to pull back as estimates are lowered, while more tangible signs of share losses could pressure the multiple," analyst Tim Long wrote in a note.

Meanwhile, Long is more cautious than management on total reported device sale (TRDS) units. Qualcomm expects global 3G/4G device shipments to grow 5–11 percent in calendar year 2016, while the analyst sees only 2 percent growth in TRDS units, even with non-phones growing by 20 percent.

In addition, Qualcomm's share of baseband modems has been under a lot of pressure. Long warned that Intel Corporation INTC's win at Apple Inc. AAPL and Mediatek's potential entry into Samsung could further pressure QCT margins.

"After peaking at over 70 percent share, we now estimate that QCOM has less than half of the market," Long noted.

Notably, Qualcomm currently has 100 percent market share, while local press in Asia has been talking about Intel's share moving higher, potentially to 50 percent of the iPhone 7 model.

Long predicts another 400 bp of market share loss in fiscal year 2017, following the losses of about 900 bp in both fiscal years 2015 and FY 2016. Further, the analyst believes his unit estimates could prove "too aggressive" if Intel and Mediatek outperform at Apple and SAMSUNG ELECTRONIC KRW5000 SSNLF.

"There is good valuation support, with a 3.9 percent dividend yield and a 10 percent free cash flow yield, but we do not believe this is enough to help the stock track the peer group," Long added.

At the time of writing, shares of Qualcomm were down 0.39 percent to $54.67. Long maintained his price target of $50 on the stock.