Amid a broad market rally, mobile-chip giant Qualcomm (NASDAQ:QCOM) sat on the sidelines this week, significantly lagging the rest of the market. What were investors worried about?
A lot of hopes have been pinned on Samsung's newest Galaxy S4 flagship device. Qualcomm enjoys relationships with both Samsung and Apple (NASDAQ:AAPL), the top two vendors currently dominating the global smartphone market. While Apple is in a summer lull and new iPhones aren't expecting to be launched until this fall, Qualcomm is happy to ride its win in the Galaxy S4, as its Snapdragon chips power several of the geographical variants.
Unfortunately for Samsung and Qualcomm, Galaxy S4 sales may not be stacking up to lofty expectations. Samsung lost more than 6% of its value on Friday on concerns over the Galaxy S4. JPMorgan Chase analyst J.J. Park believes Galaxy S4 units will disappoint investors, and that the South Korean conglomerate has been reducing its orders. Samsung also recently introduced lower-end versions of its flagships, including the Galaxy S4 Mini. That could put pressure on Samsung's revenue and margins.
That's all potentially bad news for Qualcomm. Disappointing unit sales would translate into the sale of fewer Snapdragons, while reducing selling prices of Samsungs would result in lower royalties to Qualcomm. In the meantime, it may be another few months until Apple ramps up new iPhone models carrying Qualcomm baseband modems.
Topeka Capital markets also expressed some neutral sentiment, starting coverage on Qualcomm with a "hold" rating and a $65 price target. Topeka analyst Suji De Silva believes Qualcomm has a strong position to capitalize on smartphone trends but that those opportunities are already priced in at current levels. Qualcomm faces competitive risks that could put pressure on margins as smartphone sales progress to emerging markets.
Qualcomm has underperformed the market year to date and currently trades at just 17.4 times earnings. That's a compelling valuation for one of the companies best positioned to continue riding smartphone adoption, risks included.