Are Analysts Misleading Investors on Qualcomm?

Vijay Nagarajan has done a number of pieces on Qualcomm over the last few weeks, and it is time to take a look at how the stock is doing. Here is the chart:

For recap, here are Vijay’s pieces:

* QualComm: Legal Battles Galore
* QualComm: The Aftermath
* QualComm: The Margins

In a nutshell, as Vijay points out, Qualcomm’s margin-heavy technology licensing business model is under threat. The biggest reason why Qualcomm trades at the kind of valuation that it does, is that its highly profitable technology licensing business model allows it to have close to 20% higher net margins than other competitors like TI. If that business model gets destroyed, and as Vijay’s analysis on Margins demonstrates, “Continued reversals will thus make Qualcomm a more typical semiconductor company.”

However, if you look at the current analyst ratings on Qualcomm, they tend to mostly be BUY (8) and STRONG BUY (15).

There is 1 analyst who gives the company a STRONG SELL rating. I wonder if this person sees what I see …

Most of the analysts cite Qualcomm’s prospects in India and China as strong growth opportunities that would save the day. Well, not if Nokia has dropped Qualcomm, since Nokia is #1 in both markets.

Another commonly cited ‘save the day’ is spinning off Qualcomm’s IP business (QTL), which will release the pressure off the chip business, which should continue to grow normally. Well, again, Qualcomm enjoys those fat margins BECAUSE of QTL, and separating that from the chip business would make the latter a ‘normal semiconductor company’, devoid of the sweet sauce that has made Qualcomm a unique play.

I am anxious to see what Vijay comes up with as follow-on analysis on Qualcomm’s future. For the moment, I would think Qualcomm is perhaps a stock to short. What do you say, Vijay?