Buy Qualcomm For The Momentum In China, Stay For The NXP Acquisition

Michael Walkley of Canaccord Genuity is bullish on QUALCOMM, Inc. (NASDAQ: QCOM), despite the company’s light guidance weighing on the shares, as an improved momentum in China and an NXP Semiconductors NV (NASDAQ: NXPI) deal would boost fundamentals.

Following is a gist of Qualcomm’s fourth-quarter earnings:

• Q4 EPS of $1.28, $0.15 above the Street’s consensus.
• Revenue of $6.2 billion, up 13.8 percent year-over-year, also comes in $360 million above expectations.
• Management guides for Q1 sales of $5.7 billion to $6.5 billion, versus estimates of $6.15 billion.
• Management sees Q1 EPS of $1.12-$1.22, mostly below the Street’s $1.22 estimate.

Walkley said the earnings results came in above his $1.18 estimate as payments from Chinese licensing deals boosted QTL revenue.

The analyst believes Qualcomm’s licensing business is on track to reach management’s targets of $10 billion in revenue by F2020, driven by expected improved collections from Chinese OEMs along with initiatives in IoT and non-smartphone markets.

In addition, the ramping of sales of the Snapdragon 820 to leading high-end Android smartphones led to strong QCT share gains with improving revenue per MSM and margins for the quarter.

As such, the analyst maintains its Buy rating and $81 target price on the stock.

“Q1/F’17 guidance was in line with consensus expectations as strong MSM shipments to Chinese OEMs offset lost share in the iPhone 7 and weaker near-term sales into the Note 7,” Walkley wrote in a note.

Further, the analyst is positive on NXP acquisition, saying the combined entity will deliver strong earnings and cash flow. Further, the deal would help Qualcomm becoming “a clear industry leader in the mobile, IoT, and automotive semiconductor markets, backed by an extremely strong combined Qualcomm, NXP (Philips) and Freescale (Motorola) IP portfolio.”

Based on strong QCT trends, the analyst increased his F'17/F’18 pro forma EPS estimates to $4.85/$5.08 from $4.80/$5.00.

At time of writing, shares of Qualcomm fell 1.03 percent to $66.40.

Image Credit: By The Conmunity - Pop Culture Geek from Los Angeles, CA, USA (CES 2012 - Qualcomm) [CC BY 2.0] via Wikimedia Commons

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