We downgrade our recommendation on
) to Neutral as we believe that the stock is currently fairly
Why the Downgrade?
We downgrade Qualcomm primarily based on its current
valuation, which is trading at the high-end of its 52-week price
range. With respect to several valuation metrics, the stock is
currently trading at significantly higher multiples compared with
the S&P 500.
Moreover, we believe that aggressive competition in the mobile
phone chipset market may hurt Qualcomm's profits in the future.
Competition is likely to emanate from formidable rivals like
), as well as from low-cost competitors like Mediatek of Taiwan
and VIA Technologies of China.
Balanced View on Qualcomm
We believe that Qualcomm will continue to perform wellon the
back of a significant surge in demand for smartphones and
tablets. Management is quite confident that it willbe able to
retainits current pace of revenue and earnings growth for at
least the next five years. In our view, the long-term
fundamentals of the company are intriguing given the growing
demand for LTE-enabled mobile handsets in the U.S., Japan and
Qualcomm has firmly established its leadership position in the
high-end smartphone segment. The company has significantly
benefited from the significant growth of 3G wireless technologies
and smartphones in the emerging markets, China in particular.
The next-generation 4G Long Term Evolution (LTE) technology
has also boosted Qualcomm's market position. The company has
become a major chipset vendor for global smartphone giants,
), Samsung and HTC.
Nevertheless, the ongoing global economic volatility may
severely impact the telecommunications industry, which in turn
will negatively affect the demand for Qualcomm developed
chipsets. Qualcomm's future growth is dependent on the continuous
deployment of CDMA/OFDMA based network technologies.
If the emerging markets fail to maintain the current run 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.
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