Qualcomm (QCOM) delivered big gains for investors in 2020, but they have been a lot harder to come by in 2021. In fact, the stock is down 11% year-to-date, far below the 15% returns the PHLX Semiconductor (SOX) index – the chip industry’s barometer index – has generated this year.

However, taking a look at Qualcomm’s two main segments – QTL (Qualcomm Technology Licensing) and QCT (Qualcomm CDMA Technologies) – J.P. Morgan’s Samik Chatterjee’s SOTP (sum-of-the-parts) analysis shows the shares are undervalued.

Chatterjee rates QCOM shares an Overweight (i.e. Buy) along with a $175 price target. Investors could be sitting on gains of 30%, should Chatterjee’s forecast play out as anticipated. (To watch Chatterjee’s track record, click here)

Chatterjee views QTL as a “mature low-growth business funding dividends.” And while the analyst concedes the perception of “flat revenue/earnings in QTL smartphone,” is not far off the mark, the analyst anticipates non-handset growth at roughly a $1 billion revenue run-rate, which should grow at least at “a mid-teens pace.” Chatterjee says the segment appears “underappreciated by investors,” and thinks 1/4 of the projected upside should be attributable to QTL.

The other 3/4s are reserved for QCT, which Chatterjee sees as a “growth business with leadership in smartphone technology being leveraged to drive diversification into auto, IoT, and compute.”

The analyst also thinks this segment is set up to perform much better than consensus expectations, and over the medium term, anticiaptes it to increase revenue at a 10%-15% CAGR (compound annual growth rate).

This is despite admitting growth in the smartphone baseband market is “likely to moderate starting in FY22.” However, offsetting the moderation in smartphone growth, will be the acceleration of revenue generated from non-smartphone end-markets – the previously mentioned auto, IoT, and compute segments.

Additionally, Chatterjjee attributes part of the reason for the current negative sentiment around Qualcomm to the sizeable business it stands to lose, should Apple, per its plans, begin making its iPhone modems in-house, instead of sourcing them out to Qualcomm. However, this disintermediation from Apple is already priced in, says the 5-star analyst, and in any case, Chatterjee thinks the prospect of a full disintermediation is “quite unlikely.”

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Looking at the Street’s average price target for QCOM shares, it appears Chatterjee’s colleagues also think they are trading below fair value. The figure comes in at $169.42, implying one-year upside of ~26%. Overall, the stock has a Moderate Buy consensus rating, based on 8 Buys, 6 Holds and 1 Sell. (See Qualcomm stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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