Susquehanna Financial Group‘s semiconductor analyst Chris Caso today reflects on the likely impact to Qualcomm (QCOM) from what he’s gleaned about Apple‘s (AAPL) iPhone plans, where Qualcomm’s baseband processor is the dominant wireless chip.
Caso, who has a “Positive” rating, and an $85 price target on Qualcomm stock, writes that according to his “checks” of the electronics supply chain, Q2 sales of the iPhone will be under pressure but Q3 will “see a catalyst from the ramp of the [iPhone] 5S, and a more meaningful catalyst once a larger screen iPhone enters production.”
According to Caso, the numbers for Q1, meaning, Apple’s fiscal Q2 ending this month, are about as expected for the iPhone, but Q2 is less clear:
We believe that 1Q iPhone production came in at approximately 35 mln units, at the low end of our prior 35-40 mlm expectation [�] The current 1Q build plans appear close to current expectations (1Q consensus estimate is about 37 mln units). In addition, our conversations with iPhone component suppliers through the quarter (including recent follow-up checks) indicate no substantial order cuts since the beginning of the quarter [�] Visibility for 2Q has been difficult since we expect production for the new iPhone 5S to begin in June. The volume of 5S production has a big effect on the 2Q build plan, since production of existing models always declines ahead of a transition.
Caso is concerned there’s no larger-screen iPhone forthcoming, but he thinks Qualcomm will be okay by riding its participation in Samsung Electronics‘s (005930KS) Galaxy S4:
In our view, the slowdown in iPhone is an AAPL-specific issue, as evidenced by the upside we have observed from Samsung this quarter (even before the Galaxy S4 launch). We think the issue is clear and simple � consumers want a larger screen-size iPhone. Our checks do indicate that a larger screen-size phone is on the roadmap, but the timing remains uncertain. SFG analyst Mehdi Hosseini�s checks (Smartphone Domination Continues, Semi Benefiting from Better DRAM ASPs) indicate upside of about 7 mln units in 1Q, which is before the launch of the company’s flagship phone in 2Q. We think the incremental upside from Samsung more than offsets the sluggish performance by AAPL. In addition, for QCOM the share shift from AAPL to Samsung is beneficial to both QTL (Samsung royalties are calculated at higher ASPs) and QCT (QCOM will have about double the semiconductor content in the initial versions of GS4 vs. iPhone). We therefore think the strength at Samsung provides a fairly smooth transition into the seasonally stronger 2H for AAPL.
Qualcomm stock today is up 11 cents at $66.36.
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