Lazard Capital Markets chip analyst Ian Ing today started coverage of Qualcomm (QCOM) with a Buy rating and a $67 price target, based on the premise that people will spend more and more of their budgets on smartphones and other “connected devices,” and as complexity proliferates in wireless networks, increasing sales of the company’s wireless chips.
Qualcomm has two parts to its business, the chipset part, which sells components, and the licensing business, which makes royalties by letting others use Qualcomm’s intellectual property.
Regarding chip sales, Ing thinks Qualcomm’s experience makes it a preferred provider of basebands among equipment makers and also among telcos:
We believe investors should not underestimate the system engineering challenges and experience curve required to help OEMs qualify their radios on a global carrier�s network [...] Qualcomm is uniquely positioned to support global multi-mode 3G/4G standards in an integrated modem. Among OEMs, we believe AAPL is taking the initiative for common platform world phones that work across all major carriers. Other leading OEMs (Samsung, HTC, Nokia) still appear to develop tailored platforms for groups of carriers (e.g., WCDMA, CDMA2K). That said, they could choose the common platform approach should their models rival iPhones across global markets. AAPL has decided that manufacturing, supplier, and SKU management savings given their high volumes offsets supporting extra functionality that may not be necessarily needed once deployed at a specific carrier.
As far as the royalty business, it should prosper as more advanced phones flood the world, boosting the royalty-generating units for Qualcomm’s technology:
We estimate QCOM collected royalties on about 40% of handset units in CY10, which were largely based on 3G/4G technologies as well as IS-95 2G CDMA (i.e., Verizon, Sprint). QCOM does not collect royalties on 2G/Edge handsets. Over the next four years, we expect the 3G/4G mix to increase to over 65% of handsets and drive a larger royalty base. We note that presently well over 90% of subscribers in China and India (> 1.5B subscriptions) are on 2G/Edge, and will start making the move to 3G/4G as operators continue rolling out new 3G networks.
Qualcomm shares today closed up 6 cents at $52.61.
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