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Analyst Blog

On Aug 25, 2014, we issued an updated research report on Qualcomm Inc. (QCOM - Analyst Report). The company has considerably improved its year-over-year performance on strong contributions from its Internetworking and Broadband Access product divisions. The results were also supported by an improved spending atmosphere and increased strategic investments by its carrier and enterprise customers. Meanwhile, the company’s international business also generated record high revenues.

Qualcomm has delivered positive earnings surprises in three quarters last year, with an average beat of 7.92%. Further, the company reported strong financial results for the third quarter of fiscal 2014 with both the top and the bottom line significantly beating the Zacks Consensus Estimate.

Qualcomm benefits from the significant growth in demand for 3G/4GLTE wireless technologies and smartphones in emerging markets, particularly China. Moreover, growing deployment of 4G Long Term Evolution (LTE) technology in China may further drive Qualcomm’s chip demand. Notably, the company is a major chipset provider to Apple Inc. (AAPL - Analyst Report) and Samsung, which together constitute 40% of the smarphone and 50% of the tablet market, globally.

Qualcomm has a highly diversified product portfolio. Several original equipment manufacturers are adopting high-speed 3G and 4G technologies for connecting tablets, eReaders, machine-to-machine communication and gaming devices. Qualcomm’s state-of-the-art Snapdragon and Gobi platforms for global wireless connectivity support almost all varieties of mobile broadband equipment.

In the meantime, the company has taken two significant steps to develop advanced WiFi chipsets utilizing the super fast 60GHz technology. The first step involves the takeover of Wilocity Ltd., a leading Israeli developer of 60 GHz wireless chipsets based on IEEE 802.11 ad standard, popularly known as WiGig technology.

Secondly, Qualcomm is in the process to develop a tri-band platform that will integrate its WiFi technology from the previously acquired Atheros Communications Inc. with the WiGig solutions to significantly enhance the performance of wireless applications. Moreover, in Jan 2014, Qualcomm acquired a portfolio of patents from Hewlett-Packard Company (HPQ - Analyst Report) for an undisclosed amount. Acquisition of this patent portfolio will enable Qualcomm to enhance its presence in the global mobility market more aggressively.

However, Qualcomm is facing several challenges related to its licensing business in China. Management stated that the company is currently facing a royalty dispute with a major customer in China.

Moreover, the smartphone market has become intensely competitive resulting in lower ASP, which in turn, may negatively impact Qualcomm’s royalty business. Also, aggressive competition in the mobile phone chipset market may hurt Qualcomm’s profits in the future. Meanwhile, the company is facing severe competitive threat from close rival, Intel Corporation (INTC), which has been redesigning chipsets for the mobile computing market.

Qualcomm currently carries a Zacks Rank #3 (Hold).

A better-ranked stock worth considering in this sector is DragonWave Inc. (DRWI - Snapshot Report) with a Zacks Rank #2 (Buy).

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