Is Qualcomm A Value Stock Or Value Trap?

RBC Capital's Amit Daryanani initiated coverage of QUALCOMM, Inc. QCOM with a Sector Perform rating and price target of $55. Daryanani believes that the company is the undisputed leader of the wireless communications semiconductor industry, and that its leadership position and share of the smartphone market would only improve with the move to 5G, expected in 2020. "There could be near-term upside to QTL expectation of $7.3-8.0B, if one were to factor in the "normalized" 2.9 percent royalty rate guidance," the analyst said. However, Daryanani also pointed out that there were several long term factors to consider, such as the potential for upside if smaller companies were to accept China's NDRC terms, handset ASPs declining and thereby creating headings, ongoing disputes in Korea and Taiwan and possibility of chip level royalties, which could prove negative for Qualcomm. The QCT segment, on the other hand, has witnessed market share losses with OEMs going in-house and Mediatek gaining significant share of the low-end market in China. "We think the way to combat this threat would be for QCOM to be more aggressive on the low-end as a way to pick-up share and OEMs early in their ramps," Daryanani stated. "Given a strong balance sheet, we think M&A could be a lever to drive diversity but may create incremental risk. We would get more positive if we see (1) better patent protection; (2) Stability in royalty rates and/or smartphone ASPs; or (3) acquisitions that accelerate diversification," the RBC Capital report added.