Are Analysts Misleading Investors on Qualcomm?

Vijay Nagarajan has done a number of pieces on Qualcomm over the last few weeks, and it is time to take a look at how the stock is doing. Here is the chart:

For recap, here are Vijay’s pieces:

• QualComm: Legal Battles Galore
• QualComm: The Aftermath
• QualComm: The Margins

In a nutshell, as Vijay points out, Qualcomm’s margin-heavy technology licensing business model is under threat. The biggest reason why Qualcomm trades at the kind of valuation that it does, is that its highly profitable technology licensing business model allows it to have close to 20% higher net margins than other competitors like TI. If that business model gets destroyed, and as Vijay’s analysis on Margins demonstrates, “Continued reversals will thus make QualComm a more typical semiconductor company.”

However, if you look at the current analyst ratings on Qualcomm, they tend to mostly be BUY (8) and STRONG BUY (15).

There is 1 analyst who gives the company a STRONG SELL rating. I wonder if this person sees what I see …

Most of the analysts cite Qualcomm’s prospects in India and China as strong growth opportunities that would save the day. Well, not if Nokia has dropped Qualcomm, since Nokia is #1 in both markets.

Another commonly cited ’save the day’ is spinning off Qualcomm’s IP business (QTL), which will release the pressure off the chip business, which should continue to grow normally. Well, again, Qualcomm enjoys those fat margins BECAUSE of QTL, and separating that from the chip business would make the latter a ‘normal semiconductor company’, devoid of the sweet sauce that has made Qualcomm a unique play.

I am anxious to see what Vijay comes up with as follow-on analysis on Qualcomm’s future. For the moment, I would think Qualcomm is perhaps a stock to short. What do you say, Vijay?

Comments

[Jolly Green...:]

"Well, not if Nokia has dropped Qualcomm, since Nokia is #1 in both markets."



How is Nokia going to drop QCOM? As a chip provider?....No loss there, as they already go elsewhere.

Not even Nokia disputes that QC should receive royalty payments for their IP in 3G phone standards. Their dispute is over the amount of royalties paid (QC has significantly less IP in WCDMA than in their bread and butter CDMA standard). I didn’t see any other reasoning behind your argument for this being a weak stock other than the possibility of losing Nokia (which I mentioned, isn’t possible).



Maybe this is why so many analysts rate QCOM as a buy; they actually understand the business model. QC will be reaping the rewards of WCDMA for years to come and is well positioned for 4gG (LTE/UMB) as well.



Wi-Max is a different story…

2007 Oct 02 06:09 PM

[Sramana:]

Jolly,

Why don't you click on the links, and read the rest of the analysis?
There are 2 reasons cited, not one. The first, in fact, is that Qualcomm's privileged position in the chip business is NOT due its chip business, but due to QTL. If the royalties are not as easy to come, then the stock would not be valued as high. It would become a normal semiconductor company.

The second reason is that it cannot win by fighting with Nokia in the emerging markets, since Nokia is the #1 player.

The fact is, Qualcomm IS fighting with Nokia.

Sramana

2007 Oct 02 08:10 PM

[PierreDBC:]

JGG, the way that Nokia "dropped" QC was by ceasing all development in QC's family of standards (3gpp2). They stopped developing their own chips (which they used to do) and also all phone designs. They brand some minor ODM activity in the 3gpp2 family. But by and large, they pulled out. This reduces support for the standard and support for QC's fat royalties. For those inside the industry, it was a significant event. I don't understand how in the same post you say "QC has significantly less IP in WCDMA" and "QC will be reaping the rewards of WCDMA." The first statement is correct. The second is...well, misleading. They will (and do) get royalties on WCDMA also, but with all these legal challenges it is clear that they won't be in the same dominant position, and therefore won't be able to sustain quite the same margins (which was S.Mitra's point, I believe).

2007 Oct 03 01:09 AM

[Vijay Nagar...:]

JGG, I think the point that was being made is that if QualComm's licensing model breaks (and as you say, by the amount of royalties paid), and if QualComm cannot increase its chipset market share (since Nokia is not its customer and is unlikely to be given the existing suppliers and the current legal situation), then perhaps the stock would not be as strong! Basically, the IP business will grow but the chipset business may stint and that is not good in the long run, esp. in 4G where the patent play is not as strong and the chipset market share will be the one to count.

2007 Oct 02 06:40 PM

[jimmy Turano:]

Great article sramana because I always wondered
how consistantly wrong research firms are for the past 5 years with the over inflated target prices of certain stocks. In fact Jim cramer finished touting the same company 32 times until last week and now tells investors to wait until it goes back down to $12 dollars to buy. The stock is NSTK, and I think to much hype is misleading investors all around. Thank you for your story, and keep up the good work!
JIMMY T

2007 Oct 03 10:53 AM

[Tomas:]

You can't ignore the fact that despite Nokia not buying Qualcomm chipsets they are still the number one 3G Mobile phone chipset provider in the world.

2007 Oct 04 04:02 AM