Will Qualcomm’s Move To Sell UK Spectrum Create Opportunities For The Company?

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Leading mobile chipmaker Qualcomm (NASDAQ:QCOM) has put a chunk of spectrum up for sale in Britain which could appeal to mobile operators grappling with the demand for Internet access.Qualcomm said it will begin trading L-band spectrum owned by subsidiary Qualcomm UK Spectrum (QUKS) following a recent European Commission decision to utilize the spectrum to boost downlink data rates in mobile networks. The company paid close to $13.7 million for its UK L-band spectrum in an auction held by Ofcom in 2008. Since, the announcement, Qualcomm’s share price has declined by approximately 2.08% to $66.84.  (Qualcomm puts UK spectrum up for sale, Reuters, June 8th, 2015))

The company said that its UK subsidiary decided to begin trading the spectrum because the EC decision means the spectrum is now harmonized and mandated for mobile broadband SDL. Another factor is that the technical terms of QUKS’s license were varied by Ofcom to allow SDL to be deployed, so the company now plans to offer its spectrum for sale.

Qualcomm is specifically selling 40MHz worth of 1.4GHz L-Band spectrum, which can be used for both 4G/LTE and 3G/HSPA+ networks. More spectrum allows a mobile operator to keep up with the growing 3G and 4G traffic in the UK. As 4G becomes more popular, networks will suffer increasing strain, so buying Qualcomm’s spectrum is a solid investment in future business. Mobile operators have come under increasing pressure in recent years to upgrade their networks to meet demand from customers who want to download more Internet pages, videos and photos. The desire to use smartphones for an array of services, such as watching video, means the quality of network is also becoming a factor when consumers choose which operator to sign up to.

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Qualcomm usually peddles processors for smartphones, but flogging cellular spectrum could make for a quick cash boost. It will create an opportunity for Qualcomm to explore emerging business models and advanced mobile technologies. Hence, the company is helping the market to harness its potential. This will ultimately benefit consumers, offering them high quality services and a range of creative applications. The company said that it “believes that SDL can be key to meet the increase of 4G mobile data traffic globally that is downlink centric.”

At the moment, there is no sign of any takers for the licence, but so long as the price is right then Qualcomm shouldn’t likely have any problem offloading its spectrum. The question is, just how much more than the initial £8.3 million does Qualcomm expect to receive? Especially given the extra R&D it has invested over the past seven years. Rather conveniently for Qualcomm, this sale comes just a month after UK regulator UK Ofcom said it was going to amend Qualcomm’s licence to enable the use of SDL, coming into effect on 19 June.

Despite negative sentiment in the market reflected by a decline in the stock price, Qualcomm continues to look attractive due to several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity. The company’s strengths can be seen in multiple areas, such as its revenue growth (revenues slightly increased by 8.3% quarter on quarter), largely solid financial position with reasonable debt levels by most measures (QCOM’s debt-to-equity ratio is very low at 0.03), notable return on equity and expanding profit margins (gross profit margin for QCOM is currently at 67.17%.). We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Our price estimate of $71 for Qualcomm is approximately at a premium of 5% with the current market price. For fiscal year 2015, we estimate the company to report revenue of $29 billion and net income of $8.1 billion. Also, our non-GAAP EPS estimate is $4.70 as compared to the market consensus of $4.79.

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