Credit Suisse upgraded chip maker Qualcomm (QCOM) to outperform from neutral and raised profit estimates of the company, citing improved visibility on earnings growth.
Qualcomm makes chips and software that power cell phones and licenses its technology to other makers of chips and handsets.
We believe that improving visibility on earnings growth will result in the shares re-rating, analyst K. Garcha wrote in a note to clients.
The analyst said Qualcomm's Technology Licensing (QTL) business will grow again as the outlook of average selling prices is improving.
Garcha expects 25 percent revenue growth in QTL business in fiscal 2011, as Qualcomm's addressable market is expected to grow 22 percent in fiscal 2011 to $790 million owing to 3G adoption, robust and accelerating smartphone growth and the emergence of new connected devices including tablets.
While each category within the addressable market will see double digit price declines, the improving mix impact of tablets and smartphones means that blended ASP can remain flattish at around $190 through FY12, Garcha said.
The analyst now expects wireless CDMA chipset share to rise longer term to 45 percent, with margins sustainable at about 27 percent, given strong Android alignment.
Garcha expects Android could capture 23 percent of the smartphone market in 2011 in addition to ramping at new customers such as Nokia (NOK) and Apple (AAPL).
Meanwhile, Qualcomm's Snapdragon processor is allowing the company to address new adjacencies such as tablets.
Qualcomm's Snapdragon chips is now on 55 devices with more than 60 carriers and has over 125+ design wins including 10 different companies for tablets. Snapdragon has achieved leadership positions on both Android and Windows Phone 7.
The first next-generation, dual-core, multi-mode 3G/4G integrated Snapdragon chipset the MSM8960 will be shipped in the current quarter.
Garcha added that an early move to 28nm manufacturing in late fiscal 2011 should provide a cost advantage at the low-end of the market, where the analyst expects robust volume growth. 28nm is a new Systems-on-Chip (SoCs) design platform that is expected to deliver higher speeds and efficiency.
The analyst also raised the company's fiscal 2011 profit estimates by 5 percent to $2.84 per share and target price to $60 from $50.
Meanwhile, Deutsche Bank analyst Brian Modoff said the company showed continued signs of improved and regained confidence.
The product roadmap continues to lead the competitive field by a healthy margin, Modoff wrote after attending Qualcomm's analyst day on November 18.
Modoff, who has a 'buy rating and $55 price target on Qualcomm stock, said the company gave better clarity on how device prices impact their licensing business. Mix shift may remain an issue near-term, but the company is now positioned to grow again.
In addition, RBC Capital Markets analyst Mark Sue said Qualcomm's planned transition to 28nm in calendar 2011 is intended to distance itself from the competition.
Competitors like Nvidia with its Tegra processor are gaining traction with some OEMs yet may find it difficult to achieve the cost/performance attributes of this advanced technology. We expect Qualcomm to price its 28nm solutions aggressively to gain incremental market share, Sue wrote.
Sue has an outperform rating and $60 price target on Qualcomm stock.
Shares of California-based Qualcomm closed Thursday's regular trading session at $47.72.