QCOM: Samsung, Apple Competition Should Keep Growth Intact, Says Susquehanna

Susquehanna Investment Group’s Chris Caso today reiterates a “Positive” rating on shares of shares of Qualcomm (QCOM), writing that “heightened competition between Samsung [Electronics (005930KS)] and Apple (AAPL) is likely to accelerate innovation at the high end.”

“And with so much potential for innovation, we just don�t see replacement cycles or ASPs declining in the near term.”

Contrary to a skeptical report last week from J.P. Morgan’s Rod Hall, who cut his rating on the stock based on a concern the migration to smartphones is slowing, and prices for Qualcomm’s chipsets are set to fall, Caso thinks continued innovation in smartphones, bred of competition, will keep volume and prices rising:

The smartphone penetration rate in developed markets is 62%, so there is a more valid concern that ASPs could compress or replacement rates could lengthen. But we think this comes down to the pace of innovation in the smartphone market. As long as phone OEMs continue to introduce new innovations, they are going to convince consumers to upgrade their phones. One can certainly argue that iPhone 5 wasn�t innovative enough relative to iPhone 4S, and we do think that has caused Samsung to gain some market share. But that only means that the competitive intensity is likely to increase going forward as AAPL and Samsung fight for share, and as BlackBerry (BBRY) and Microsoft (MSFT) fight for a seat at the table. And we�re confident that, similar to the history of the PC market, that improvement in semiconductor technology will allow for innovation in both hardware and software. Until the capabilities of smartphones and PCs converge � and there is still a long way to go � we don�t think we will hit a plateau. In the near term, it appears that ASPs in developed regions have been increasing, which we think has been driven by success of not just iPhone and the Galaxy S phones, but also by innovations such as the Galaxy Note line. We also note that share gains by Samsung are actually incrementally positive for QCOM since Samsung royalties are calculated at a higher rate than AAPL.

Caso thinks that Qualcomm’s chipset has technical advantages over would-be competitors such as Broadcom (BRCM) and Nvidia (NVDA):

Their competitive advantage has only increased over the last year, and the capacity constraints have now been lifted. The latest QCOM processors, announced last month, appear to offer nearly double the performance versus generic ARM Cortex A-15 solutions, and QCOM�s modem technology remains generations ahead of competitors.

Estimates should rise this year, thinks Caso, as “Based on the start to the year, we find it difficult for QCOM to not end the year with upside absent a macro correction.” Estimates for calendar 2014 could also rise given that smartphone sales in China are only 27% of the total mobile market there.

Qualcomm shares today are down 34 cents, or half a percent, at $65.33.