$Q-Qualcomm The Downstream Play on Smartphone Upside $73 Price Targe

$Q-Qualcomm The Downstream Play on Smartphone Upside $73 Price Targe 58% upside

We are initiating coverage of QCOM with an
Overweight rating and $57 price target as we believe
the company is highly leveraged to the key growth
themes in communications equipment, namely mobile
data – through 3G penetration – and smartphone growth.
Our F2010 EPS estimate of $2.37 sits comfortably
above management guidance of $2.10-2.30 as we
believe the benefits of WCDMA market growth and chip
market share expansion outweigh the risks of lower
royalty rates and handset ASP. Our underlying thesis is
based on two concepts.

First, as smartphones drive into the midrange, we
expect the industry to shift towards integrated
processors, where QCOM is uniquely differentiated.
We therefore are modeling QCOM’s market share to
grow from an estimated 38% in F2009 to 51% in F2012,
representing share gains primarily at Nokia but also at
potentially Apple and RIM. While discrete processors
are sometimes preferred for super high-end handsets,
the power and cost savings of integrated processors
make them far better suited for mid-range smartphones,
which is already becoming the bulk of the market.

Second, smartphone growth should accelerate the
migration to 3G, while helping offset handset ASP
pressure and thereby royalty revenue. This should
more than offset declines in royalty rates and the natural
ASP step-down as 3G expands into developing markets.

Key risks to our thesis include commoditization of
chipsets led by MediaTek, downward pressure on
royalty revenues caused by renewed pressure on
royalty rates, severe declines in handset ASP as 3G
penetrates emerging markets, and generic y/y
deceleration in unit growth as the base grows
[morgan stanley]
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