(QCOM) Qualcomm Analyst Maintains Neutral on Shares

We are maintaining our cautious stance on Qualcomm Inc. (QCOM) despite the company’s improved performance in the second quarter of 2011.

Qualcomm, the largest global manufacturer of mobile phone chipsets, reported solid second quarter 2011 financial results where both the top and bottom line beat the Zacks Consensus Estimate. Moreover, robust results, higher smartphone demand and increased 3G network deployment in emerging nations have allowed management to provide strong financial outlook for fiscal 2011.

Qualcomm benefited from the growing popularity of Android-based 3G smartphones. According to Wireless Intelligence reports, there were nearly 1.3 billion 3G subscribers worldwide by the end of March this year. Another research firm, GSA stated that there were total 18 LTE network deployments till date, which indicates improving chipset demand going forward.

CDMA iPhone of Apple Inc. (AAPL) has become a major growth driver for Qualcomm. Apple started selling iPhone 4 with Verizon Wireless from February 2011. Several industry sources 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. Furthermore, Nokia Corporation will be using Qualcomm’s chipsets in their upcoming Windows Phone 7-based smartphones, which is expected to be another positive for the company.

Recently, Qualcomm completed the acquisition of Wi-Fi chip set maker Atheros Communications, Inc., which will enable the company to diversify in the consumer electronics segment, particularly in the home networking market.

However, smartphone market is becoming increasingly competitive resulting in lower ASP of smartphones, which in turn, may negatively impact Qualcomm’s royalty business. Fluctuation in royalty rates and weaker-than-expected smartphone demand may hurt Qualcomm’s top line. Moreover, the roll out of 3G networks in emerging nations like India and China is slower-than-expected, which will likely affect the company’s profitability during the period. Furthermore, the acquisition of Atheros may lead to integration risks.

We thus maintain our long-term Neutral recommendation on Qualcomm. Currently, Qualcomm has a Zacks#3 Rank, implying a short-term Hold rating on the stock.

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