Shares of Qualcomm (QCOM 0.97%) have been on an absolute tear over the last several months. While the high end smartphone market has proven challenging for almost all players involved, Qualcomm has benefited from a broad secular shift to 3G/4G technologies as well as a strong position in the mobile chip space. However, as shares trade north of $79, the stock now trades above my fair value estimate.
The $79 target price -- reached!
In the piece, Shorting Qualcomm Seems Like a Bad Idea, the case was made for a $79 price target. Indeed, assuming a 10% EPS growth CAGR, and not providing a meaningful discount to the cash on hand (this is probably an aggressive assumption, however), the shares really do look to be worth about $79 today. When the article was penned, shares traded at $76/share, and as of the time of writing the stock now trades at $79.05.
While investors who managed to get in at a much lower price are sitting pretty and can enjoy the nice dividend, it's a lot tougher to recommend the stock to "fresh money." This isn't necessarily a call suggesting that the stock will see meaningful downside from current levels, but unless you're willing to model a more aggressive EPS growth rate, it does suggest the shares could be range-bound for the foreseeable future.
Competition could now become a concern
Qualcomm has done an excellent job of building and monetizing its patent war-chest, and while the company's mobile silicon business is first rate, there is the very real concern that competitive pressures will become material for the company's chip business. In particular, Qualcomm now faces two very real threats:
- Samsung's (NASDAQOTH: SSNLF) own chip team
- Intel's (INTC 4.88%) mobile efforts
Samsung is an awkward "frenemy" to Qualcomm. On one hand, Samsung has been trying to improve its Exynos line of chips as well as its LTE modems, but has so far been unable to match/surpass Qualcomm's efforts. However, a big part of this has been due to the fact that Samsung has been using stock ARM (ARMH +0.00%) IP cores in its designs, which aren't as optimized as Qualcomm's Krait cores are. Samsung's SoCs in 2016 could prove much more competitive, however.
Why Intel could be a very painful competitor
Today, Intel isn't viewed as a serious threat to Qualcomm in the smartphone chip space, but given Intel's investment level in this space and the progress it has made, it's only a matter of time. Right now, MediaTek is Qualcomm's biggest pain in the chip space as it produces competent and inexpensive products for mass-market smartphones.
MediaTek doesn't have any fundamental advantage over Qualcomm -- in fact, Qualcomm's chip/IP teams are exceptionally strong and well-funded -- and yet it is still able to take pretty meaningful share in the China markets. Now, what happens when Intel, a company that's far richer than MediaTek, has much more robust IP development teams, has a significant semiconductor manufacturing technology lead, and its own high-volume factories, finally delivers?
But Qualcomm's business isn't primarily chips!
As detailed in the article linked above, Qualcomm indeed derives about two thirds of its operating profit from technology licensing and only a third of its operating profit from chip sales. So, even if Intel/MediaTek/whomever manages to take some pretty significant chip share, Qualcomm should still do just fine riding the secular growth trends, right?
Well, of course Qualcomm's business isn't going to collapse, but the real question is what growth rate Qualcomm will ultimately be able to deliver over the next 3-5 years. The chip business is still material to Qualcomm's bottom line, so pressure there would most certainly be felt. Does this mean Qualcomm is a structural short? No, but it means that there will be enough risk to the company's results that the stock could see multiple compression.
