Merrill Lynch Bullish on Two Tech Stocks: QUALCOMM, Inc. (QCOM), Microsoft Corporation (MSFT)

Analysts from Merrill Lynch weighed in with bullish ratings on semiconductor giant QUALCOMM, Inc. (NASDAQ:QCOM) and tech leader Microsoft Corporation (NASDAQ:MSFT). Despite an export ban to a major customer, one analyst maintains a Buy rating on QUALCOMM noting a recent dividend increase, while another analyst projects catalysts for Microsoft’s stock in the second half of the year.


Analyst Tal Liani weighed in on QCOM following the U.S. Commerce Department’s decision to ban the sale of U.S. components to Chinese company ZTE, the world’s 7th largest smartphone company. According to the USCD, ZTE violated export agreements by supplying U.S. made high-tech goods to Iran; a claim that ZTE denies. The analyst believes “This disruption could impact Qualcomm negatively, given the Snapdragon’s success in ZTE products,” where it has “the majority share in ZTE devices.” Snapdragon is one of Qualcomm’s mobile processors.

The analyst notes that his calculations indicate ZTE sales could contribute $878 million to QCT 2016 revenues, one of Qualcomm’s main segments, resulting in potential unit losses of 12 million for the company in the third quarter. Despite this setback, the analyst is waiting for “further clarity on Qualcomm’s potential export license applications” before changing his estimates. He also mentions a recent announcement of a 10% increase in dividends, causing him to increase his dividend estimates.

Liani maintains his Buy rating on the company with a $75 price target, noting that he is waiting to gain clarity on how the ban on ZTE will impact sales.

According to TipRanks, Tal Liani has a 50% success rate recommending stocks with an average return of 1.3% per recommendation. Out of the 19 analysts who have rated the company in the past 3 months, 12 gave a Buy rating and 7 remain neutral. The average 12-month price target for the stock is $59.29, marking a 14% upside from where shares last closed.

Microsoft Corporation

In addition, analyst Kash Rangan of Merrill Lynch weighed in on Microsoft after data from his firm’s IT hardware team indicated that “the PC installed base peaked in 2015,” which could threaten the analyst’s estimates for the company in 2016. He notes that PC shipments are already down 10% in the first quarter following the release of Windows 10. Similarly, recent data suggest that a December quarter decline in the server market due to competition from cloud servers such as Amazon AWS and Microsoft Azure.

The analyst believes that catalysts for Microsoft stock will only occur after July of this year due to Windows upgrades. He explains, “In our view, there is likely to be no catalyst from Win 10 until the expiration of the free upgrade offer at the end of July.” He also comments on Microsoft Surface, believing it drives strong revenues for the company, offsetting gross profits from Windows. He explains, “We estimate that 20% Surface revenue growth from current levels would be gross profit neutral equivalent to $200mn in Win revenue.” According to the analyst, other catalysts for the stock include the Q3 release of Windows Server 2016 and a shift from Office E4 to E5.

The analyst maintains his buy rating and $65 price target for the stock, believing that “the main driver will be earnings growth that will need to lift the stock.” He continues, “One key is cloud gross profit dollars and E5 cycle need to offset potential decline in server and tools units as computing moves to public cloud.”

According to TipRanks, Kash Rangan has a 61% success rate recommending stocks with an average return of 7% per recommendation.

Kash Rangan

Out of the 21 analysts who have rated Microsoft in the last 3 months, 14 gave a Buy rating, 2 gave a Sell rating, and 5 remain on the sidelines. The average 12-month price target for the stock is $58.38, marking a 10% upside from where shares last closed.

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