In a deadly blow to QUALCOMM Incorporated (QCOM - Free Report) , the U.S. government has banned sale of components by American firms to Chinese telecom equipment maker, ZTE Corp. Share prices of most Silicon Valley suppliers took a beating on the news, with Qualcomm falling 1.7% to close at $54.77 as on Apr 16.
Qualcomm’s improved and upgraded technologies are allowing companies to build new and updated products and services across the wireless ecosystem, thus better serving customers. For Qualcomm, association with China’s leading smartphone manufacturers means additional royalties. The company had earlier signed multiple licensing deals with various Chinese smartphone makers including Xiaomi. With these deals, it intends to extend its commitment to constantly aid the growth of Chinese companies and develop wireless networks, devices and applications.
Citing a breach of agreement inked last year, the U.S. Department of Commerce slapped a seven-year ban on sale of various components to ZTE after it was caught illegally shipping goods to Iran. The strategic move is likely to hit Qualcomm the most, as it accounts for the lion’s share of semiconductor chips used in ZTE smartphones.
ZTE reportedly shipped about 46.4 million smartphones last year. Going by a conservative estimate, if Qualcomm accounted for even half of them, it would mean a loss of business of approximately $0.5 billion, assuming an average cost of $25 for every chip used.
In addition, Qualcomm could end up ceding its market position to its rivals as ZTE is the fourth largest smartphone vendor in the United States after Apple Inc. (AAPL - Free Report) , Samsung Electronics and LG Electronics, with 11.2% market share, according to data from research firm, Canalys.
Moreover, given the trade war between the United States and China, there seems to be no respite for Qualcomm. The Trump administration also perceives heightened threat of losing its technological prowess to the Chinese counterparts having earlier blocked a hostile bid by Singapore-based Broadcom Limited (AVGO - Free Report) for Qualcomm.
This semiconductor chipmaker has underperformed the industry with an average loss of 19.5% in the last three months compared with a decline of 7.8% for the latter. It remains to be seen how Qualcomm responds to these challenges in the near future with some key insights expected in the first-quarter 2018 earnings conference call.
Qualcomm carries a Zacks Rank #3 (Hold). A better-ranked stock in the industry is Comtech Telecommunications Corp. (CMTL - Free Report) , sporting Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Comtech Telecommunications has a long-term earnings growth expectation of 5%. It delivered an average positive earnings surprise of 111.4% in the trailing four quarters, beating estimates in each.
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