Qualcomm Inc. (Nasdaq: QCOM) stock has taken a dive over the past month after the company announced it was having trouble collecting royalties from Chinese cellphone makers, but a market analyst’s report on Wednesday said investors might be overreacting.
Since peaking at $81.60 in late July, Qualcomm’s stock price has fallen 7 percent to its current level at roughly $76. The decline began after Qualcomm announced that even though “China continues to present significant opportunities for us…, (it) also presents significant challenges.”
The company said “certain licensees in China currently are not fully complying with their contractual obligations to report their sales of licensed products to us” and that the Chinese government was investigating whether its business practices were monopolistic.
Because of uncertainty over how much money it can collect on royalties from China, Qualcomm's market estimates now exclude sales of roughly 215 million Chinese-produced devices, representing 16.5 percent of its expected shipments this year.
After discussions with Qualcomm officials, however, Tim Long, an analyst with BMO Capital Markets, says investors may be reading too much into the Chinese disputes.
"The situation in China remains murky," Long said in a new research report.
But he added that it is wrong to assume Qualcomm will get zero royalties in China. Long instead suggested that at least half of Chinese-produced units will continue generating royalties worth 4-5 percent of sales. Long suggests Qualcomm could reach an agreement where the royalties from China average 2 percent domestically and 3 percent for exports, which would limit the impact to between 10 and 20 cents in Qualcomm’s earnings per share.
“Once a royalty rate is established, we would continue to expect Qualcomm royalty revenues to grow at 7-8 percent over the next three to five years,” he said.
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