Wall Street expectations for Apple (AAPL) iPhone supplier Qualcomm (QCOM) to report $1.83 billion in September-quarter licensing revenue is too aggressive, Bernstein analyst Stacy Rasgon said Thursday as he downgraded Qualcomm stock.
Qualcomm stock has lifted 24.5% since hitting a nearly six-year low below 43 on Feb. 11. But Qualcomm is in a "no growth scenario," estimates haven't yet bottomed and the Apple supplier is likely to miss its fiscal Q4 (ending in September) licensing views by $150 million, Rasgon says.
Tough contract negotiations and antitrust investigations in China, South Korea and Taiwan have stunted Qualcomm's growth. In China, investors are concerned that product makers are underreporting chip set sales as Qualcomm works to re-sign customers to new contracts.
"To see significant upside from here we would need confidence in some long-term growth story and comfort that estimates have bottomed," he wrote in a research report. "However, we find ourselves still a bit hesitant to sign up for the former."
And estimates remain too high, Rasgon says. For fiscal Q3, Qualcomm expects total reported device sales (TRDS) to reach $52 billion to $60 billion from its licensees. The consensus models $57.4 billion. Qualcomm collects licensing fees from those sales.
For fiscal Q4, the consensus expects Qualcomm to collect $1.83 billion in licensing fees, $150 million ahead of Rasgon's $1.68 billion estimate. Rasgon models a 12% dip in licensing fees from the June quarter, or down 2% sequentially when adjusting for a $200 million catch-up payment from LG.
"We suspect the consensus may be modeling in 'catch-up' (licensing revenues) from new China deals, which suggests that either licensing outlook could miss expectations if they don't sign deals, or that there is limited upside to the numbers if they do," he wrote.
More broadly, investors are concerned about potential share losses to Intel and potential order cuts in the second half of 2016. Apple reportedly tapped Intel (INTC) to source some of its iPhone 7 modems, partially replacing incumbent Qualcomm.
Rasgon downgraded Qualcomm stock to market perform but kept a 55 price target, representing "a company that doesn't go into secular decline, but also never grows free cash flow again."
Qualcomm stock ended virtually flat at 53.57 on the stock market today, as it's being tested at its 50-day line.
