In 2020, Qualcomm (QCOM) couldn’t put a foot wrong. A series of fantastic earnings displays, resolutions to business headwinds and a favorable court case outcome, all helped propel the share price forward. But in 2021, the semiconductor giant is experiencing a bit of a wobble; Year-to-date, the stock is down by 14%.
Chip supply constraints are partly to blame but recent reports concerning one of Qualcomm’s biggest customers might be having an effect, too.
Apple recently said it intends to invest in a new German facility. With a focus on 5G and wireless technologies, the Munich-based site will be called the European Silicon Design Center. What this indicates, is that Apple is potentially looking to make its iPhone modems in-house, instead of sourcing them out to Qualcomm.
Apple has so far remained silent about a possible transition, but the investment in the facility and the noises coming from the supply chain indicate that a baseband substitution could come into play with the launch of the 2023 iPhone line-up.
J.P. Morgan analyst Samik Chatterjee estimates that Apple accounts for almost 20% of the company’s revenues, including 14% from QCT (Qualcomm CDMA Technologies) and 5% from QTL (Qualcomm Technology Licensing). Therefore, losing the Apple windfall will impact Qualcomm’s earnings power.
“Relative to our FY22 earnings estimate of $8.60,” the 5-star analyst said, “We estimate the earnings power for the company is closer to ~$7 when excluding Apple revenues from QCT.”
This is a base-case scenario, a worst-case scenario also removes QTL royalties – less likely due to a 6-year agreement between the companies – resulting in earnings power closer to $5.70.
That said, against this backdrop, Chatterjee still remains a Qualcomm bull.
“While we expect there to be an overhang on the shares on account of the supply chain constraints as well as the substitution risk, we continue to rate QCOM shares Overweight, led by confidence in sustainable double-digit revenue growth as well as potential acquisitions to accelerate non-smartphone growth and enhance earnings power,” Chatterjee said.
The vote of confidence is backed by a $170 price target, implying upside potential of ~30% over the next 12 months. (To watch Chatterjee’s track record, click here)
Turning now to the rest of the Street, where the $171.67 average price target is just above Chatterjee’s and indicates 12-month gains of 31%. While not all analysts are on board, most remain confident in Qualcomm’s continued success; Based on 12 Buys vs. 7 Holds, the stock boasts a Moderate Buy consensus rating. (See QCOM stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
