We are downgrading our recommendation on Qualcomm Inc. (QCOM) to Neutral based on its current valuation. The stock price has moved up by nearly 68% in the last year. Qualcomm continues to perform exceptionally well primarily due to significant surge in demand for 3G smartphones. The company’s innovative Snapdragon platform and product diversification make management more confident about fiscal 2011. Therefore, it has provided a solid financial outlook.
We continue to believe the robust growth of wireless data, emerging 4G LTE networks, and a very strong balance sheet will serve as long-term catalysts for Qualcomm. In addition to North America, Japan, and South Korea; China and India will be the future growth drivers for the company. Qualcomm has a sound foothold in these two countries. However, we also believe that these positives are already reflected in the current valuation leaving little room for above market gain.
Qualcomm benefited from the growing popularity of Android-based 3G smartphones. Android operating system was developed by Google Inc. (GOOG) and requires more complex and expensive processors to work properly. Qualcomm’s next-generation Snapdragon processors are generally used in Android- powered 3G smartphones. Snapdragon platform supports a wide range of operating systems including Windows Mobile 7 of Microsoft Corp. (MSFT). Recent decision of Nokia Corp. (NOK) to adopt Windows 7 as operating system for its upcoming smartphones will be highly beneficial for Qualcomm.
CDMA iPhone of Apple Inc. (AAPL) become a major growth driver for Qualcomm. Apple started selling iPhone 4 with Verizon Wireless (VZ) from February 2011. Although Qualcomm did not forecast any specific number of chipset it will sell to Apple, it believed that CDMA iPhone is a boost for the company. Several industry sources have also predicted that Apple may also use Qualcomm’s dual-mode CDMA/WCDMA chipset for its upcoming iPhone 5. Another near-term driver is the upcoming Windows operating system developed by Microsoft, which will support ARM-based chipset architecture of the company.
Meanwhile, we remain concerned regarding near-term supply-chain management system of Qualcomm mainly attributable to devastating earthquake and tsunami in Japan. Although Qualcomm has rejected such issues, but we still remain skeptical. Further, Japan is a major revenue generator of Qualcomm and fluctuations in Japanese smartphone demand may also hurt the company.
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