We reiterate our long-term Neutral recommendation on Qualcomm Inc. (QCOM - Analyst Report). The company posted mixed financial results for the second quarter of fiscal 2013.
Why Kept at Neutral?
We believe that Qualcomm will continue to perform wellon the back of significant surge in the demand for smartphones and tablets. The long-term fundamentals of the company remain intriguing given the increasing demand for LTE-enabled mobile handsets in the U.S.A., Japan, and South Korea, rapid transition from 2G to 3G in China and India, and increasing licensing revenues. Management is quite confident that it will be able to retainits current pace of revenues and earnings growth for at least the next five years.
Qualcomm has firmly established its leadership position in the high-end smartphone segment. It has a diversified client base. Qualcomm supplies mobile chipset for all three major operating systems, namely iOS of Apple Inc. (AAPL - Analyst Report), Android of Google Inc. and Windows Phone of Microsoft Corp. (MSFT - Analyst Report). The company is a major chipset supplier for Samsung, which is currently the largest seller of smartphones globally. Qualcomm currently has a Zacks Rank #3 (Hold).
Nevertheless, the ongoing global economic volatility may severely impact the telecommunications industry, which in turn may negatively affect the demand for Qualcomm developed chipsets. Qualcomm’s future growth is dependent upon the continuous deployment of CDMA/OFDMA-based network technologies.
If the emerging markets fail to maintain the current rate of installing high-speed 3G, next-generation 4G or any hybrid 3G-4G wireless networks, the demand for smartphones will decline, which will negatively affect Qualcomm’s financials. Aggressive competition in the mobile phone chipset market may hurt Qualcomm’s profit in the future.