Sell-Side Bullish On Qualcomm After Quarterly Report; BofA Sees Growth Ahead In 5G

QUALCOMM, Inc. QCOM shares were rebounding Thursday after the company guided to a softer June quarter, putting a damper on an otherwise strong earnings report that showed a better-than-expected March quarter.

Multiple sell-side analysts reiterated their Buy positions on the stock — and Bank of America upgraded to Buy — with the general consensus being that the chipmaker's short-term weakness is likely transitory, with benefits from 5G on the horizon.  

The company has seen a run-up in its stock price since announcing a settlement of patent and royalty litigation with Apple Inc AAPL.

The Analysts

Bank of America Merrill Lynch analyst Tal Liani upgraded Qualcomm from Neutral to Buy and raised the price objective from $90 to $105.

Rosenblatt Securities analyst Jun Zhang maintained a Buy rating and $84 price target.

Mizuho’s Vijay Rakesh maintained a Buy rating and raised the price target from $82 to $90.

UBS Securities analyst Timothy Arcuri remained Neutral and maintained an $80 price target.

Morgan Stanley’s James Faucette maintained an Overweight rating on the stock with a $95 price target.

The Takeaways

The weakness Qualcomm sees ahead is transitory, BofA’s Liani said in the upgrade note. Part of the issue is that the cell phone replacement cycle is getting longer — but the conclusion of the Apple litigation and 5G will drive success, the analyst said. 

“We believe 3Q marks a trough ahead of a 5G handset cycle, which should catalyze growth,” Liani said. 

Rosenblatt’s Zhang said the soft guidance wasn’t a surprise. “We believe Qualcomm will face short-term pressure with Huawei taking market share from other Android smartphones,” the analyst said. In the second half of 2019, several Chinese firms are expected to launch 5G smartphones, which should benefit Qualcomm, he said. 

Apple’s restart of the use of Qualcomm modems also likely will be a catalyst in the second half, Zhang said. Rosenblatt is putting Apple’s contribution to Qualcomm revenue at over $1 billion and expects more than $500 million in licensing fees in the second half of 2019.

Mizuho’s Rakesh also likes the expected effect of the Apple settlement, but noted a lack of near-term catalysts. Global mobile handset sales are expected to be down year-over-year in 2019, with weakness in China and slowing replacement cycles. Still, in the long-term, “QCOM remains an underowned turnaround story," the analyst said. 

UBS’ Arcuri said Qualcomm is still facing claims before the Federal Trade Commission. Ultimately, the Apple settlement and the coming opportunities in 5G are good news, offset by softness in handsets, the analyst said — keeping UBS Neutral.

Morgan Stanley’s Faucette is also looking at Qualcomm competitor Huawei.

The company "is really the only growing handset OEM, and in 2018 likely accounted for more than 100% of industry growth (ie, it grew but the rest of the industry shrank slightly) and 2019 looks like it will be similar," he said. 

“And by virtue of using primarily chipsets from its wholly-owned subsidiary HiSilicon, and not paying full royalties, it is hurting QUALCOMM’s ability to show as much immediate benefit as some might have imagined.”

Price Action

Qualcomm shares were up 0.34 percent at $86.66 at the time of publication Thursday. 

Related Links:

Qualcomm Beats Street On Q2 Earnings, But Offers Lower Guidance

'Significant Win': Wall Street Weighs In On Qualcomm-Apple Deal

Photo courtesy of Qualcomm.