Qualcomm Upgraded on Chip Mettle

Analyst says chip strength can carry the company through royalty setbacks.
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Qualcomm

(QCOM) - Get Report

upgraded to a buy on the strength of its wireless chip business.

JPMorgan analyst Ehud Gelblum raised his rating from neutral Monday despite acknowledging that the costly standoff with

Nokia

(NOK) - Get Report

might end with a licensing settlement set at nearly half its current rate.

Through arbitration or a court order, Gelblum says the new royalty rate with Nokia will likely be about half the current rate. The new terms will likely make for a blended average rate across all its licenses of around 2% to 2.5%, down from the estimated 4% to 4.5% range, Gelblum writes.

Qualcomm and Nokia have reached an impasse on a licensing agreement. Nokia is seeking a much lower payment plan than it had previously with Qualcomm. The two wireless titans have entered binding arbitration in an effort to reach a deal, Qualcomm says.

But for Gelblum, the real value in the stock is the resurgent chip business, which has benefited from heavy research and development spending. Qualcomm is the No.1 wireless chipmaker, according to iSuppli, and it has introduced a single chip platform that should help stimulate lower-priced phone sales in developing markets.

"The outlook for the chip business is stronger and the product pipeline deeper than we have ever seen it," Gelblum writes in his note.

Qualcomm shares rose 32 cents to 41.68 in pre-market trading Monday.