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Qorvo And Qualcomm: Just Give Us A Break! – QUALCOMM Incorporated (NASDAQ: QCOM)



By K C Ma and Bilal Hashmi

Both Qorvo (QRVO) and Qualcomm (QCOM) have come a long way with China. Qualcomm continues to see weak high-end handset sales in China, which may become a serious obstacle ahead of Qualcomm's 5G launch. Although the latest Apple settlement removals are the biggest risk to their stock, the smartphone weakness could still loiter the 5G disaster. In contrast, Qorvo starts the year with a healthy growth in smartphone content and 5G chips with Huawei and Samsung. The resulting double-digit 1Q sales outlook confirms Qorvo's leadership in 5G radio frequency chips. As a result, Huawei's ability to do business with U.S. companies as their major suppliers and customers, is pivotal to Qorvo and Qualcomm's near-term growth in 5G.

As part of the "Tit for Tat" response to the ongoing trade war against China, the US Commerce Department placed Huawei, China State-owned Telecom Company, on an "Entity List" that bans US suppliers from selling components or parts to the Chinese telecom without government's approval. Additionally, President Trump signed an executive order that prohibits U.S. telecoms from buying foreign-made equipment including risk to national security, laying the groundwork to effectively stop US telecoms from using Huawei equipment on their networks.

Next to Micron Technology (MU), Qorvo and Qualcomm are the two U.S. firms which have significant Huawei's revenue to lose. At this point, it is estimated that Qorvo has 13% and Qualcomm has 2.63% revenue exposures from Huawei (Table 1A and Bloomberg tables 2A and 2B). While the new U.S. embargo may have been designed to target China in general and to cripple Huawei's 5G operating activities in particular, it is the interest of this article to estimate the stock price impact of the proposed ban on Qorvo and Qualcomm's shareholders.

Qorvo and Qualcomm's China Revenue Exposures

Since the US Ban to sell telecom components works practically like the embargo, the revenue impact is both direct and immediate. As for the magnitude of the exposure, depending on the political interpretation of foreign-based companies and the risk they impose on national security, the entire 60% of Qorvo's China revenue and Qualcomm's 67% China revenue can theoretically be at risk (Table 1) . For this reason, I identified all of Qorvo and Qualcomm's Asia customers from Bloomberg's Supply Chain Database. Figure 2A and Figure 2B (Bloomberg screen) illustrate the fact that received 13% revenue from Huawei (as of 5/17/2019) and Qualcomm has 2.63% (as or 12/31/2018). The following tables, individual customers and their relationship value (revenue) with Qorvo and Qualcomm are identified in Table 1A and 1B.

Table 2A: Qorvo's Revenue Exposure from Huawei (13%)

(Bloomberg Supply Chain) [19659009] Table 2B: Qualcomm Revenue Exposure from Huawei (2.63%)

(Bloomberg Supply Chain)

Qorvo's level 1 customers include Huawei (13%) and ZTE (OTC: OTCPK: ZTCOF) (0.19%) whose revenue may be at risk because of the ban. To a lesser extent, Qualcomm has a 2.86% revenue from their Level 1 customers (Table 1A). China's level 2 customers contributing 3.01% revenue are the next potential ones on the US blacklist since Huawei can easily buy US chips through these companies, as "white gloves." and Taiwan, it is conceivable that the same reason for level 2 customers can apply to "Level 3" companies. Level 3 customers contribute 3.70% to Qorvo's revenue. On the same token, Qualcomm has 13 Level two firms which contribute 5.31% Revenue and 26 Level 3 Greater China firms with another 19.08% revenue (Table 1B) .In other words, Qorvo and Qualcomm are both vulnerable at multiple levels as they have revenue exposure from Huawei and ZTE, the rest of China firms, and the Hong Kong and Taiwan firms

I should point out that the above revenue estimates are on the low end, since Bloomberg only identifies "quantifiable" customers / suppliers with verifiable numbers. Query and Qualcomm have more than 60% China revenue exposure. But the sum of all the numbers in Table 1A or Table 1B is much lower than 60%. As the analysis conducted in this post is limited by the data at hand, the conclusion may only reflect a fraction of the maximum impact.

From Revenue Losses to Stock Price Losses

The easy task is to identify the revenue exposure because it is on record. However, the more elusive one is to convert revenue to stock price changes. For that, I rely on a stock valuation model that relates company revenue to the stock price since it is Qorvo or Qualcomm's revenue at stake. If a stock is valued based on its price to sales multiple, simple algebra will show that the% change in stock price can be approximated by the% change in revenue and the% change in price to sales:

% change stock price = % change in Sales +% change in P / S

Since the P / S multiple depends on future revenue growth, so the% change in P / S needs to be first estimated with the expected change in revenue growth. For Qorvo's (Qualcomm's) case, Figure 1 (Figure 2) shows a clear positively correlated relationship between P / S and revenue growth rate. Specifically, for every 1% change in Qorvo (Qualcomm) revenue growth rate, it will reduce the P / S ratio by 0.05 (0.4).

]

To show how to use the valuation model as outlined, for example, if Qualcomm's revenue growth is expected to increase by 10% and P / S will increase by 4% as a result, will increase by 14% in total because of revenue growth.

As Qorvo is expected to lose -13.19% revenue for the loss of Huawei and ZTE , adding the associated loss on P / S (-1.74%), Qualcomm's stock is expected to decline at -14.93% (Table 2C). Similarly, the stock will drop another -3.41%. If Taiwan and Hong Kong are also on the embargo list, there will be another -4.19% loss on the stock.

Similarly for Qualcomm but with a different degree, the -2.86% loss in revenue will turn in -4.78% loss in QCOM stock prices. If the loss is extended to other China customers or Taiwan and Hong Kong customers, the revenue will amount to -24% and the stock will potentially lose another 40% (Table 2D).

How Much Already Baked Into Stock Prices ?

With such a grim picture being painted for these US Huawei's customers, one has to ask the question how much bad news about Huawei's ban has already been baked into the stock prices. Based on the above analysis, QRVO and QCOM should have reacted to the Huawei's ban news at the order of -15% and -5%, respectively. However, in the real word, QRVO was down -8% and QCOM was down -3% amid White House's announcement.

The fact that the stock prices have not fully reflected the extent of potential revenue seems to suggest some glimpse of hope. The market may have seen through the intricacy of the international trade that the announced ban or embargo can be easily "mitigated" by the companies as the tariffs have been. Or, the market may have seen through the intricacy of the trade negotiation that the surplus ban on Huawei can be quickly reversed when it was instituted. Incidentally, before I was able to hit the "submit" button of this post, the following announcement just came through the news: "The United States has temporarily delayed trade" on China's Huawei to minimize disruption for its customers, a move the founder of the world's largest telecommunications equipment maker said little about it was already prepared for US action. ”

Disclosure: I / we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions . I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company, which is mentioned in this article.

Editor's Note: exchange. Please be aware of the risks associated with these stocks. 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