We downgrade our recommendation for Qualcomm Inc. (QCOM) to Underperform ahead of its first quarter fiscal 2010 financial results. According to our view, the ongoing global economic recession may generate earnings fluctuations in the near-term. The stock price has moved up more than 50% in the last one year and is currently trading at the high-end of its 52-week price range. With respect to several valuation metrics, the stock is also trading at a significantly higher multiple compared to the S&P 500 averages. Financial outlook given by the management for full fiscal 2010 also remains tepid. Furthermore, we believe that Qualcomm’s ongoing patent-related legal battles will adversely affect its financials.
Qualcomm expects to ship between 89 million – 92 million MSM chipsets during the first quarter of fiscal 2010 which is 0.6% below its mid-point compared to the previous quarter. Qualcomm also projected that its first quarter fiscal 2010 revenue will be within the range of $2.55 billion – $2.75 billion. This is also 1.5% below its mid-point compared to the previous quarter. Qualcomm has focused predominantly on CDMA wireless technology, while much of Europe and other parts of the world use GSM networks and other competing wireless protocols. There can be no assurance that CDMA can maintain its growth projection in the market.
Management has already declared that aggressive competition in the mobile phone chipset market will hurt Qualcomm’s profit during fiscal 2010 coupled with a slowdown in handset upgrade by consumers throughout the world. Competition is likely to occur from formidable U.S. rivals like Broadcom Corp. (BRCM) and Texas Instruments Inc. (TXN) as well as from low-cost competitors like Mediatek of Taiwan and VIA Technologies of China.
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