Why Qualcomm Shares Could Fall to $74

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Qualcomm (NASDAQ: QCOM  )  fell more than 6% in Thursday's trading after Susquehanna analyst Chris Caso downgraded shares of the mobile chipset specialist from Positive to Neutral following its third quarter report.

So what: Caso simultaneously lowered his price target on Qualcomm shares from $95 to $74, representing a 3% downside from the stock's levels as of this writing. The call also stands in stark contrast to a pre-earnings upgrade only yesterday from Northland Capital, which effectively hinged on Qualcomm turning in a good quarter on LTE growth in multiple new markets, despite increasing competition in China.

Now what: Qualcomm's Q3 results were indeed solid -- if a bit mundane -- and even exceeded analysts' consensus expectations on both the top and bottom lines. Caso noted, however, "After a year of emphatically stressing their confidence that they would collect royalties on China 4G, QCOM management last night changed their view, dramatically reducing the number of handsets for which they expect to collect royalties, including both China 4G as well as some emerging market 3G." Because incremental China 4G revenues were "the central element of [their] bullish thesis," Caso went on, and because Qualcomm licensees will suffer an inherent disadvantage to OEMs who choose not to pay royalties. For now, Caso feels they had "no choice" but to implement the ratings change.

This in mind, considering management has a solid track record of resolving these kinds of situations through either negotiation or -- if that doesn't work -- litigation, I don't think shareholders should be terribly worried about Qualcomm's prospects. The market naturally hates to be told to hurry up and wait as tantalizing incremental revenue sits just out of reach, but patient investors can rest easy collecting Qualcomm's solid dividend in the meantime.

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  • Report this Comment On July 24, 2014, at 3:40 PM, DoctorLewis4 wrote:

    QCOM has had to deal with these issues before. The behavior by these companies in China is poor, and does not serve them well. They will have to make a deal with QCOM, it's bad business not to. This is a speed bump.

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