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Stock Strategist

Qualcomm's China Struggles Linger

But even with a lower revenue outlook, we think the shares are undervalued.

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 Qualcomm (QCOM) provided investors with a disappointing outlook for revenue from its licensing business, QTL, in the next fiscal year, as sales may stagnate for the fourth straight year despite strong ongoing adoption of 3G and 4G smartphones. Not only is Qualcomm struggling to finalize licensing deals with certain large Chinese original-equipment manufacturers in accordance with the Chinese government's agreed-upon structure, but these holdout firms (presumably Xiaomi, among others) are reporting even lower sales figures to Qualcomm while these negotiations drag on, thus weighing on Qualcomm's near-term revenue.

Combine this with hefty pricing pressure on the Android side of the smartphone market, as high-end phone makers slash prices to keep up with Chinese firms selling high-end phones at midrange prices, and Qualcomm forecasts flattish (at best) QTL revenue for fiscal 2016. We still ultimately believe Qualcomm will collect royalties on the vast majority of 3G and 4G devices sold in the long term, but QTL's turnaround in licensing might not be a quick one. Although we're cutting our fair value estimate slightly to reflect lower near-term revenue, we still view the shares as undervalued. We maintain our wide economic moat rating.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.