A Wells Fargo analyst initiated coverage of Qualcomm (QCOM) - Get Report Monday with an underweight rating and a $70 share price target, saying he believed the semiconductor maker will continue to be a victim of its own success.
Shares of the San Diego-based company, which designs and markets semiconductors mostly for mobile-communications equipment, were off slightly to $75.42.
"We are not more constructive with our rating because we believe, in many respects, QCOM will continue to be a victim of the company’s own success," analyst Gary Mobley said in a note to clients.
The analyst said "the need for anti-competitive regulatory compliance and an industry-wide reluctance to rely too heavily on QCOM's MSM (Mobile Station Modem) processors and related RF front-end (RFFE) solutions could constrain QCOM’s ability to take the market share necessary to grow in a stagnant and mature smartphone market."
RF front-end includes the various components that come between the antenna and modem of a wireless device.
"QCOM also faces an uphill battle as the U.S. and China hash out differences on trade and due to the U.S. DoC’s inclusion of Huawei on the restricted list (with possibly further restrictions)," Mobley added. "An anti-U.S. sentiment in China and Huawei’s own influence in the development of 5G standards may create a tepid environment for QCOM as it attempts to address the World’s largest mobile handset market (and to collect royalties within China)."
Last year, the U.S. Commerce Department placed Huawei on the "Entity List," a move that effectively prevents it from acquiring components and technology from American companies without prior government approval.
"In addition, mobile device OEMs continue to place more importance on developing integrated processors internally," Mobley said. "As the smartphone market grows increasingly concentrated, with the top five players dominating the smartphone market, the economics of captive mobile SoC development favors the smartphone OEMs and works against the merchant chip companies like QCOM."
In February, Federal officials indicted Huawei and two U.S. subsidiaries, charging the company with conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act.
Last month, Qualcomm topped revenue and earnings estimates for its fiscal second quarter but offered a cautious outlook amid the coronavirus pandemic.
"We see FY21 as the peak for QCOM revenue growth, and from that point forward, the aforementioned growth headwinds could become more apparent," Mobley said.