Qualcomm Update: Raise Target Price

05/06/2014 5:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

This leading tech company needs to have a relatively quick rollout in China because the customers are coming, says MoneyShow's Jim Jubak who is raising his target price as of today, May 6, 2014.

For Qualcomm (QCOM) to fully monetize its leading position in the new LTE wireless networks, it needs a reasonably fast rollout of that new network technology in China.

The question isn’t “if” but “when.” And you have to decide if you’re patient enough to ride out the dips when the rollout of LTE in China isn’t running on schedule. Qualcomm has been a member of my Jubak’s Picks portfolio since July 2009. The gain in that period through May 5 has been 68.49%. As of May 5, I’m raising my target price on Qualcomm to $87 a share as of September 2014 from the prior $82 a share.

That “China problem” rose up and bit Qualcomm right in the March quarter earnings report on April 24. The company beat on earnings by 9 cents a share ($1.31 a share versus the consensus estimate of $1.22) but missed on revenue. Revenue climbed 4% year over year but at $6.37 billion, fell short of the expected $6.49 billion. For the June quarter and for all of fiscal 2014, the company confirmed guidance that matched existing Wall Street forecasts. The shares dropped 2.9% that day. They have since recovered just about all of that retreat from $80.21 a share.

The problem in China is that customers are buying fewer phones as they wait for the new LTE networks. That has cut into the licensing and royalty revenue that Qualcomm makes. Sequentially, revenue fell 4% from December quarter and the 4% year over year increase in revenue was the slowest since 2010. Sales of Qualcomm’s mobile modem chipsets were up 9% year over but down 12% from the December quarter.

That problem looks like it will become less of a problem in the second half of the year as companies such as China Mobile (CHL) roll out their network and ramp up sales of phones that can use the new network with its higher speeds for data and video. For example, China Mobile, the world’s largest wireless carrier, is projecting that it will have 100 million LTE customers by the end of the year. That’s an ambitious schedule that envisioned giving customers in Beijing, Shanghai, and 14 other cities LTE access by the end of 2013 and then connecting another 340 cities by the end of 2014.

A relatively quick roll out by China Mobile of an LTE 4G network would be a huge win for Qualcomm since the company was cut out of China Mobile’s 3G network after the Chinese company went with a technology that largely bypassed Qualcomm.

There’s a good chance that the rollout won’t go smoothly and that projections of customer growth will lag at least through the middle of the year.

But these customers are coming. China Mobile has to add new customers at this level in order to produce the higher revenues for data and video needed to turn its massive investment in an LTE network profitable.

I doubt that the March quarter will be the last bump that Qualcomm hits along this road. But I think the journey will ultimately amply repay fastening your seat belt and hanging on through temporary disappointments.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Qualcomm as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

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