Qualcomm Inc. (NASDAQ: QCOM) has seen its shares struggle over the past two years, down by over a third from its mid-2014 highs. One key analyst is acknowledging that sentiment is likely very low. The stock appears cheap, and Qualcomm boasts a strong balance sheet and solid capital return. However this key analyst sees continued structural challenges to the company’s core business, and as a result the stock was downgraded.
Oppenheimer downgraded of Qualcomm to a Perform rating from Outperform and removed the $67 price target. Earnings estimates were reduced as well. A lack of tangible catalysts is likely to keep a lid on shares for the foreseeable future. With risk/reward in balance, Oppenheimer is stepping to the sidelines here.
The company’s core mobile business expects to continue to face pressure from flattening smartphone growth, vertical integration at key customers and stiff competition.
The brokerage firm detailed in its report:
Qualcomm is over-exposed to mobile, in our view. This segment offers diminishing growth, poor visibility and increasing competition. We see M&A as QCOM’s best option to diversify into stickier, higher profit markets. Qualcomm has ~$31 billion cash and generates free cash flow of ~$6 billion/yr. While M&A strategy has focused on tuck-ins, we believe the opportunity exists to take a more aggressive stance toward “gamechanging” M&A.
Oppenheimer also reduced its estimates for the next two calendar years. For 2016, the firm dropped its earnings per share (EPS) estimates to $4.00 on $22.5 billion in revenue from $4.05 per share on $21.93 billion. For 2017, estimates were reduced to $4.35 in EPS on $23.2 billion in revenue from $4.46 and $22.95 billion.
Shares of Qualcomm were trading at $52.25 on Friday, with a consensus analyst price target of $57.55 and a 52-week trading range of $42.24 to $74.09.
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