The two technology giants came to an agreement earlier this week to end settle their differences, thereby ending a two year legal war. While details have not been announced, investors are betting that Qualcomm is the big winner here, as its stock surged nearly 40% this week.
The two had been battling over patent infringement and licensing agreement, with Apple suspending all royalties to Qualcomm until the settlement; as part of the agreement, the two companies are bound by a six-year licensing deal. On the news, Canaccord analyst Michael Walkley is raising his price target to $89 (from $75), while maintaining his Buy rating on the stock. (To watch Walkley's track record, click here)
Though Walkley is waiting for Qualcomm’s earnings call scheduled for May 1, the analyst increased his estimates primarily for Apple licensing fees re-entering his model combined with lower legal expenses starting in 3Q/F19. Walkley also assumes “Qualcomm will start [supplying] 5G modems for future generation iPhones with sales starting to ramp in 4Q/F20.”
Walkley says Qualcomm’s 5G prowess played a large part in getting this deal done. He believes “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.” According to Walkley, "it is clear Apple’s settlement deal with Qualcomm likely means Apple will rely on Qualcomm for most if not all of its 5G modems in iPhones starting in 2020 with Qualcomm likely the leading to only supplier for the next several years," after Intel announced it would quit the 5G modems shortly after the agreement was reached.
Walkley sees the settlement as a big win for Qualcomm’s financials. He says, “based on the settlement announcement, we estimate that an incremental $295M and $879M of royalty revenue from Apple will return to Qualcomm for 2H/F19 and F2020, respectively.” Walkley doesn’t factor in “one-time catch up payment for Apple not paying Qualcomm during the dispute,” which is expected to be a hefty sum. Furthermore, Walkley expects the Apple deal to help bring Qualcomm and Huawei together in an agreement of their own; the analyst says, “we believe Huawei could also reach a new licensing deal with Qualcomm in the near future that we estimate could add another $0.50 to $0.70 [EPS] to our F2020 estimates.”
Even before the legal battle with Apple ended, Wall Street was bullish on Qualcomm. TipRanks analysis of 20 analyst ratings shows a consensus Moderate Buy rating, with 13 analysts saying Buy and eight Holding. As many analysts have yet to update their price targets, the average price target currently stands at $78.53, about even with current levels. (See QCOM's price targets and analyst ratings on TipRanks)