Tech giant Apple and Qualcomm have settled a legal dispute over royalties and patents, and it has Wall Street analysts buzzing over the chipmaker’s prospects moving forward.
Analysts at Stifel, J.P. Morgan and Evercore ISI all upgraded Qualcomm on Tuesday’s news. Mizuho Securities, meanwhile, hiked its price target on Qualcomm to $82 per share from $62, implying a 16.3% upside from Tuesday’s close. Canaccord Genuity also raised its price target to $89 per share from $75 and reiterated its buy rating on the company.
Apple agreed to pay Qualcomm an undisclosed amount of money in the settlement and struck a chipset supply deal, which suggests the iPhone maker will buy Qualcomm chips for future smartphones. This removes a massive overhang from Qualcomm and clears the way for both companies to focus on 5G technology. However, some analysts say Qualcomm still faces headwinds, including a lawsuit from the Federal Trade Commission.
Qualcomm shares skyrocketed 13 percent at Wednesday’s opening of trading.
Here is what analysts are saying:
“The agreement opens up the opportunity to resume chipset supply to Apple, ranging from a sizeable market share on iPhone units in the (Sep) 2020 models to an upside opportunity from capturing a primary position on the device if competitors are unable to deliver a 5G chipset.”
“The resolution caps a multi-year period in which Qualcomm’s stock has broadly been viewed as virtually uninvestible, and the resolution will likely go a long way toward assuaging investors who have been terrified of the potential for negative legal and regulatory outcomes.”
“While it is not 100% clear what the ongoing licensing payments will be and whether there are potentially any adverse implications to other customer agreements, this is clearly a meaningful positive for QCOM. We are not sure QCOM is completely out of the woods as we await a ruling from the FTC (expected imminently), though Apple’s willingness to sign an agreement today would suggest a not too negative outcome is likely. And with agreements currently in place now with Apple, Samsung, and China, it increasingly looks like this ruling will not be a terrible negative for QCOM - though clearly time will tell.”
“In our view, the settlement removes significant legal risk for Qualcomm and also clears the way for a settlement with the FTC. We believe the removal of the legal overhang, which had persisted for the last two years, allows investors to focus on Qualcomm’s core businesses which will drive a higher valuation in addition to higher earnings power. We view Qualcomm as the clear leader in 5G modem technology which should begin to ramp through CY2H2019 and 2020.”
“On the positive side for QCOM 1) the settlement will be an immediate bump to QTL license revenue starting in the JunQ and a $5-7B catchup payment with iPhone product insertion in 2H20(F21E), 2) the new six-year license agreement provides a 5G opportunity at Apple, 3) QCOM sees an incremental ~$2 EPS/year as product ramps in F21E.”
“We expect the 5G chip supply agreement and the resumption of ongoing licensing royalties to add ~$2.00 in EPS to our F2021 estimates for QCOM … While we view the settlement as encouraging and as removing a major overhang for QCOM, we remain Sector Weight, as we believe the economic benefit from the AAPL settlement is largely reflected in the stock.”
“We believe Qualcomm’s strong R&D investments and leadership in 5G modems was the key factor in Apple reaching a settlement with Qualcomm. In fact, we believe Apple and Qualcomm needed to start working together by April in order for Apple to launch 5G enabled smartphones for its September 2020 iPhone launch timeframe.”
“Coupled with our expectation for Qualcomm to have a high share in 5G overall, we believe the deal drives in excess of $7/share earnings power for FY21. While we believe the stock’s risk/reward was favorable in the $50s even amid uncertainty prior to the settlement, the stock is still only trading at ~10x that FY21 earnings power. Given greatly reduced uncertainty given licensing agreements with Samsung, China, and now Apple, we think it’s reasonable to argue for multiple expansion, and raise our price target to $85.”
“We believe the deal could be positive for Qualcomm given the restoration of licensing and chipset revenue and we estimate the deal could total an additional $7.0 billion and $1.55 EPS accretion to our C20 revenue and EPS estimates of $22.5 billion and $3.57 respectively. We expect Qualcomm’s other customers will pursue similar royalty and chipset pricing if Apple gets a good deal.”
“We see Tuesday’s settlement as a positive step, clearing legal overhangs while bringing former No.1 customer back into the fold. Impact to model remains uncertain and QCOM still faces regulatory rulings from FTC and other global regulators. We remain sidelined until model implications become clearer.”
“While Apple details and an FTC judgment remain, this is a huge step forward for Qualcomm, a company making silent progress behind lawsuit headlines … This settlement should ease investor fears that Qualcomm’s QTL business model is threatened, as the company has now reworked long-term deals with both Apple/Samsung and we believe is making progress with Huawei (interim agreement reached last quarter), allowing the multiple to grow.”
“We think the risk of changing the model to component-based licensing is muted now and going forward, the stock could start trading on its own fundamentals of strong semiconductor and licensing businesses. On the negative side, the impending FTC decision adds some risk to Qualcomm and the stock’s 28% positive move yesterday (vs SP500 +0.05%) mitigates our enthusiasm.”
“We think this settlement is a significant win for Qualcomm and results in a similar, if not better, outcome to a scenario we laid out in January, which would have been reached had Qualcomm achieved a win at the FTC … We think settlement with Apple provides Qualcomm some leverage with other handset OEMs to ensure future royalty compliance.”
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