Buy Qualcomm on discount: Scotia

San Diego-based chip maker Qualcomm Inc. is a bargain anywhere below US$64 per share, argues Scotia Capital. And once the mobile-focused company expands to the PC market, the deal will look even sweeter.

The provider of processors for Apple Inc.’s latest iPhone and iPad has been successfully riding the wave of the mobile market revolution, though one analyst believes the company’s share price has yet to reflect its success. Scotia analyst Gus Papageorgiou completed a sum-of-the-parts valuation of the company, arriving at a fair value of US$64 per share.

His conclusion represents a premium of about 15% above the company’s January 4 closing price of US$55.83 per share, suggesting there is plenty of room for upside on the stock.

“It is well known that Qualcomm holds the majority of 3G essential patents and has a highly lucrative patent licensing business,” Mr. Papageorgiou told clients, repeating his US$70 price target and outperform rating.

What is less known, he argues, is just how much value the company’s intellectual property enforcement brings to its bottom line. Patent licensing deals represent an estimated US$38 per share or about 69% of Qualcomm’s entire US$93.7-billion market capitalization, the analyst said.

Strip that away, and the remaining manufacturing business is left with about US$17 of value per share, implying the business trades at a multiple of about eight times earnings. Shares of other chip makers such as Broadcom or Nvidia typically trade at more than 12 times earnings.

“Qualcomm should trade at a premium to its peers given the cost advantages it provides to [device makers] via economies of scale and feature integration,” Mr. Papageorgiou said.

Intel Corp., the world’s largest chip maker, has been having its lunch eaten in the mobile market by Qualcomm and others building chips better suited for use in smartphones and tablets. While Intel is hoping to change that next week, Mr. Papageorgiou believes Qualcomm could soon challenge the market leader in its core PC market.

Qualcomm uses designs from British firm ARM Holdings Plc (ARM) to build its processors and Microsoft Corp. is widely expected to make its next generation Windows 8 software compatible with ARM technology. The shift away from Intel-based designs is an opportunity Qualcomm does not intend to ignore.

“Now we have the world’s largest software company saying they’re committed to this kind of platform for their flagship operating system,” Rob Chandhok, senior vice president with Qualcomm, told Bloomberg in a recent interview.

The trend to support ARM processors in desktops and laptops will open a multibillion-dollar hole in the microprocessor market, many analysts predict; one which Mr. Papageorgiou argues Qualcomm could at least partially fill, driving its fair value share price even higher.

“We have not included the PC opportunity into our model and believe there could be significant upside to our estimates should Qualcomm start taking market share away from Intel,” he said.

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