Analyst Jun Zhang of boutique research house Rosenblatt Securities today cut his rating on shares of wireless chip giant Qualcomm (QCOM), to Neutral from Buy, following its fiscal Q2 results yesterday, warning that the company’s market share of baseband modems in the next iPhone “will be down to 35% from 60%,” and that “gains in Chinese OEMs will not be enough to offset the 2H17 revenue decline from Apple.”
Qualcomm is in a legal battle with Apple (AAPL) over royalties owed, saying the company has obstructed payment to Qualcomm of royalties by contract manufacturers who are under license to Qualcomm and who build the iPhone for Apple. Its Q3 outlook was weighed down by the prospect of further obstruction.
Qualcomm started competing with Intel (INTC) for APple’s iPhone business with the latest model, the iPhone 7, which shipped in September of last year.
Citing “recent supply chain work,” Zhang writes that Qualcomm’s baseband chips sold to Apple in the second half of last year were 75 million units to 80 million units, and that the amount will drop to 45 million to 50 million in the second half of this year.
“Apple accounts for roughly 18-20% of Qualcomm’s revenue, and we believe the share loss will reduce Qualcomm’s revenue by $200M per quarter in 2H17,” writes Zhang.
“Even with share gains in Chinese OEMs through the Snapdragon 835 and a growing Samsung business in 2H17, we expect Qualcomm’s revenue to be down YoY.”
He sees Qualcomm continuing to win business at Chinese vendors Oppo and Vivo, but thinks it won’t offset the Apple revenue loss:
We believe VIVO and OPPO’s inventory issues will affect Qualcomm’s ship- ments in the near term. Samsung’s 10nm yield rate issue also results in a slow- er adoption of the Snapdragon 835 by Chinese OEMs in March and June quar- ters. We still expect Qualcomm’s market share in China to grow from 50% in 2016 to 65% in 2017 with share gains in OPPO, Vivo, Xiaomi and Meizu, with stable market share in Samsung. We also believe Chinese OEMs will adopt the Snapdragon 835 in late-Q2 or early Q3.
The Article First Appeared In barrons.com