Qualcomm shares no longer have the upside built in to warrant a Buy rating, says Evercore analyst C.J. Muse.
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Investors chipped away at Qualcomm in Monday trading after a downgrade by Evercore semiconductor analyst C.J. Muse, who argues that most of the 5G smartphone upgrade cycle is priced into the stock and competition is getting tougher.
Shares of Qualcomm (ticker: QCOM) fell 1.4% to $138.66 in the afternoon, as the PHLX Semiconductor index, or SOX, dropped 1.3%. The stock has gained 94% in the past year, as the Sox rose 103%. The S&P 500 index gained 48% in the same period.
In a research note, Muse lowered his rating to the equivalent of a Hold from a Buy and dropped his target price to $150 from $195. The analyst contends that Qualcomm shares have made solid gains—146% since before its settlement with Apple (AAPL) and 59% since Evercore added the stock to its top picks in June—but no longer have the upside built in to warrant a Buy rating.
Qualcomm now competes in a much more difficult market for the chips, which power smartphones, according to Muse. MediaTek (TWD) and Samsung Electronics have made significant strides in their smartphone processors, and will likely present more of a challenge for Qualcomm.
It isn’t just rival chip makers that will give Qualcomm headaches. One of the most substantial risks is Apple’s ambition to design and make its own wireless modem for the iPhone. Muse wrote that Qualcomm appears to have locked in business through Apple’s fall 2023 launch. Over the next year, however, news of Apple’s progress will likely damage Qualcomm stock. Muse predicts Apple may launch its modem in 2024.
Another factor in Muse’s downgrade is that the world’s transition from last-generation 4G phones to 5G phones is largely factored into the stock price. 5G phones typically have greater chip content than older models, which has benefited a number of chip makers. Muse wrote that his team predicts that the shift to 5G phones is farther along than many believe.
Adding together the pros and cons for the stock, Muse concludes that Qualcomm shares aren’t expected to outperform the other semiconductor companies that he covers, such as Nvidia and Intel.
Having said that, Muse is expecting Qualcomm to beat second-quarter expectations as demand for the company’s hardware will remain strong. Its licensing segment, too, will show strength because of catch-up payments.
Of the analysts that cover Qualcomm, 23 rate the stock a Buy, nine have a Hold rating, and one rates it a Sell. The average target price is $171, which implies upside of about 24%.
Write to Max A. Cherney at [email protected]
