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Actionable news in QCOM: QUALCOMM Incorporated,

Qualcomm: Buy Rating With A $100 Target

Summary

The main question for Qualcomm's stock performance, we believe, is when will revenue growth begin to go positive again.

We think that underlying business could actually see an inflection in end demand growth numbers in Q4 which will drive Qualcomm's results.

Before that, though, Qualcomm revenues have the chance to surprise as they re-sign customers that stopped paying after the Chinese government accused them of anti-trust.

$100 Price target, 20x $5.00 over 12-18 months or 80% upside.

Qualcomm (NASDAQ:QCOM) has gone through a period of multiple issues which has dragged results and the stock price. We think, over the next year, those issues can turn into drivers. As those drivers take hold in combination with lapping weak results, Qualcomm could begin to show an inflection point in revenue growth. We believe that is the key driver to cause investors to need to own Qualcomm, a market leader, again.

We will review each step of why the stock has become out of favor and the drivers that, we believe, will sway back fundamentals and investors.

What were the issues

1) Apple (NASDAQ:AAPL) Revenues Slowing

We know that Apple revenues have been slowing. Apple made up 45% of Qualcomm revenues in 2015 (10K). As Apple's revenues have slowed, Qualcomm has had a slowing impact on their sell-in to Apple. Below is the quarterly trend of Apple revenues.

2) Industry Revenues Slowing

IDC has said that Q1'16 global smartphone growth slowed to .2% which was down from 10.4% growth in 2015 down from 28.4% in 2014. Of which, Qualcomm has, by far, the largest market share of 3G and 4G chip technology. As goes the market so goes Qualcomm. Qualcomm, with the market, has also seen its revenues slow and go negative.

3) Anti Trust Enforcement in China

China began investigating anti-competitive claims at the turn of 2014. Those claims materially slowed business for Qualcomm. Even though Qualcomm continued to sell in to clients they had difficulty collecting or knowing if they were going to collect.

The stock price peaked soon after as the case weighed on investor sentiment and business trends. The case was resolved in February 2015 but Qualcomm continued to have difficulty collecting from customers in China. In many cases, when they collected on a sale they did not book them to revenues because they did not know what the outcome of the enforcement would be.

As for revenues, revenues started to go negative year-over-year in the June quarter of 2015. You can see in the chart above that is when the stock started to accelerate on the downside. This is also why we believe that positive revenue growth will help repair the stock price.

What has been resolved

1) There may be a new driver to market share in Asia taking share from Apple. Apple owns the premium segment but the fastest growth in Asia is coming from lower priced smartphone devices. While the overall market has been slowing, low-end device makers have been growing. According to Qualcomm, they actually have less content per unit when selling in to Apple than they do in other vendors. Because of that Qualcomm can begin to grow again. As low-end vendors take share, the mix of customers that have a higher content per phone of Qualcomm chips increases.

Top Five Smartphone Vendors, Shipments, Market Share and Year-Over-Year Growth, Q1 2016 Preliminary Data (Units in Millions)

Vendor

1Q16 Shipment Volumes

1Q16 Market Share

1Q15 Shipment Volumes

1Q15 Market Share

Year-Over-Year Change

Samsung

81.9

24.5%

82.4

24.6%

-0.6%

Apple

51.2

15.3%

61.2

18.3%

-16.3%

Huawei

27.5

8.2%

17.4

5.2%

58.4%

OPPO

18.5

5.5%

7.3

2.2%

153.2%

vivo

14.3

4.3%

6.4

1.9%

123.8%

Others

141.5

42.3%

159.8

47.8%

-11.4%

Total

334.9

100.0%

334.4

100.0%

0.2%

Samsung, Huawei and OPPO all have phones that sell in Asia for about half the price of Apple. While the overall market is seeing growth slow (.2% in the right...


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