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Robust growth of 3G CDMA wireless networks throughout the world continues to benefit Qualcomm Inc. (NASDAQ:QCOM). As of now, approximately 85% of total wireless operators throughout the world have upgraded to 3G networks. Qualcomm raised its financial outlook for the second quarter of fiscal 2010, which will be declared on April 21 after the market closes. Although the company did not update its previous estimation for CDMA/WCDMA device shipment as well as average selling price, we believe it has benefited from the higher sales of 3G CDMA smartphones.

Strong Fundamentals

We believe, in 2010 Qualcomm may become the first CDMA chipset developer having the ability to support all existing software platforms for smartphones. Various industry sources predicted that smartphone shipments as a percentage of total mobile handset shipment are expected to increase from 20% in 2009 to nearly 40% by 2014.

The company’s next-generation Snapdragon platform is getting increasing market traction among leading smart-phone and notebook developers. Qualcomm maintains a strong balance sheet with nearly $19 billion of cash & marketable securities and no outstanding debt and continues to generate positive free cash on a sequential basis.

Estimate Revisions Trend

The overall trend in estimate revisions is quite favorable. Over the last 30 days, all the 8 analysts covering the stock raised their estimates for the second quarter of fiscal 2010. For full fiscal 2010, 7 of the 14 analysts covering the stock raised estimates during the last 30 days and no analyst has made any downward revision of estimates.

Currently the Zacks Consensus Estimate for the second quarter fiscal 2010 earnings is 49 cents per share, which would be a substantial improvement of 59.3% over the prior-year quarter. Similarly, the current Zacks Consensus Estimate of $2 per share for full fiscal 2010 earnings also indicates a massive improvement of 31.5% year-over-year.

Given the significant upward estimate revisions recently, the Zacks Consensus Estimate has moved up by 4 cents in the last 30 days for the second quarter 2010 and also moved up by 7 cents for full fiscal 2010.

With respect to earnings surprises, Qualcomm’s track record is a little disappointing due to the average earnings surprise of a negative 1.75% in the last four quarters, which means that it falls below the Zacks Consensus Estimate by that measure over the last year.

The current Zacks Consensus Estimate of 49 cents for the second quarter 2010 contains no upside potential (essentially a proxy for future earning surprises). With respect to full fiscal 2010, the positive upside potential is a modest 1%.

Our Recommendation

Our long-term recommendation for Qualcomm is Neutral, which means the stock will perform in line with the broader market. The company may be in a position to benefit over time, as demand for high-end smart-phone is increasing gradually supported by the rapid deployment of 3G networks globally. However, this is also our view that these positives have already been reflected in the current valuation, leaving little room for above-market gains.

Source: Qualcomm: Earnings Preview