Qualcomm Valuation Not Taking Guidance Into Account; Pacific Crest Is Going Overweight

Shares of QUALCOMM, Inc. (NASDAQ: QCOM) have been trending southwards in 2015 and are down 31 percent year-to-date.
Pacific Crest's Michael McConnell initiated coverage of the company with an Overweight rating and a price target of $64.
QCT sales and margins are expected to bottom in F2Q16, McConnell stated.

Analyst Michael McConnell mentioned that Qualcomm's current valuation appears to discount the midpoint of Qualcomm Technology Licensing [QTL] guidance for F2016 with no value ascribed for the company's CDMA technologies [QDT].

"We are modeling QTL revenue to grow by 3% in C2016 (-4% in F2016), with segment revenue and FCF growing by a low- to mid single-digit percentage in C2017 to C2020," McConnell wrote.

The analyst expects QCT fundamentals to bottom in F2Q16 due to share gains for Samsung's upcoming GS7, cost reduction of $600 million in this fiscal year and more moderate chipset ASP declines, as the Chinese market transitions to a more "profitable smart phone replacement market."

Qualcomm is carrying out a structural/financial review with options like the separation of the QTL and QCL businesses, a material increase in shareholder returns and M&A being considered. McConnell believes that any of these options could result in a meaningful share price appreciation.

"Our target does not include upside from estimated QTL catch-up earnings of $0.32 from China licensees or QTL sales above the midpoint of company guidance for F2016," the Pacific Crest report stated.