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Here’s How Qualcomm Stock Could Still Reach Consensus Target North of $96

James Brumley

Just when it looked like Qualcomm (NASDAQ:QCOM) had put all of its legal woes in the rearview mirror, a new batch of them land in the company’s lap, taking a significant toll on QCOM stock.

Here's How Qualcomm Stock Could Still Reach Consensus Target North of $96

Since last week’s high, Qualcomm stock has fallen more than 17% on the heels of news that the FTC has successfully convinced a U.S. District Court that the company’s royalty rates for use of its patented technologies are unfairly high.

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The matter is still up for debate; Qualcomm says it intends to appeal the recent ruling from Judge Lucy Koh. Success or failure on that front may be irrelevant, however. It’s now clear that no matter what, the company will be dealing with legal headaches as long as it continues to work its current business model, using its current set of patents.

The alternative? Simply accepting lower margins, though rolling over could prove amazingly unpopular with Qualcomm stock owners. Mizuho analyst Vijay Rakesh believes the recent ruling prompted by the FTC’s efforts could cut the company’s profits in half, if the judge’s decision holds up in appellate court.

Take a closer look at some of the recent headlines though. Qualcomm has already been working on its proverbial “plan B.” It shows promise as a replacement for jeopardized high-margin revenue.

Up-Ended

A month ago, all seemed well. The company had just settled years-long legal wrangling with Apple (NASDAQ:AAPL), and then went on to disclose that its third-quarter revenue from the iPhone maker would be far greater than most anyone anticipated. Qualcomm was also coming out as a 5G player on the verge of sweeping commercialization of 5G connectivity.

Then the Huawei ban. Then the recent ruling from a California courtroom, which led Koh to order a renegotiation of patent licensing deals at “fair and reasonable prices.” The judge also made clear that exclusive deals — like the one it had made with Apple — were off-limits.

The decision clearly takes dead aim at Qualcomm’s bread and butter, given the tumble QCOM stock has seen since the latest chapter of a storied saga.

The company has actually been developing and even launching new products though, which may relieve some of the brewing pressure on its margins.

New Products

While the pace of adoption of virtual reality and augmented reality tech has been much slower than expected, the need is still there; the technology was ready before the marketplace could handle it.

To that end, Qualcomm just unveiled its Smart Viewer Reference Design, built on the Qualcomm(r) Snapdragon XR1 Platform. The technology could serve as the basis for next-generation AR and VR hardware, and deliver performance that could answer the “what do we do with it?” question that has so far bogged down the movement.

More compelling than that, though, is the recently unveiled laptop built with on-board 5G (wireless) connection hardware. Co-developed with Lenovo (OTCMKTS:LNVGY), the device offers at-home broadband speeds wherever it goes… mobile like a smartphone, but all the computing power (and keyboard) of an actual PC.

At first glance it’s a solution to a problem that doesn’t seem to exist. A second, closer look at the solution may suggest complete broadband mobility at 4G speeds wasn’t worth the time, effort or expense. The device may mark the onset of a whole new standard in laptop development.

More than that, it’s a not-so-subtle reminder that 5G is mostly going to be supplied and powered by Qualcomm, more so with the tech you don’t see than the tech you do.

Bolstering this argument is the fact that Intel (NASDAQ:INTC) is abdicating its wireless broadband modem business altogether, further clearing a path for Qualcomm.

Unusual Situation

Arguably the biggest upside for Qualcomm and QCOM stock in the midst of the madness, however, is the unique position the U.S.-China trade war’s ultimately put the tech maker in.

What it might look like remains unclear, but if Bloomberg’s Shira Ovide is right, Washington may somehow bail Qualcomm out of any trouble it may find itself in going forward.


Susquehanna Investment Group analyst Christopher Rolland’s “reasoning is that Qualcomm is the U.S.’ ‘great 5G hope,’ explains Ovide, who goes on to say “Qualcomm is one of the few American companies that is essential in guiding standards for next-generation mobile internet technology. This has become as much a symbol of nationalist self-interest as it is a technical project. The U.S. government has framed 5G as a race between the U.S. and China, and Qualcomm is running for flag and country.”

Remember, it was the U.S. government that ultimately ran interference for Qualcomm last year when Broadcom (NASDAQ:AVGO) attempted a hostile takeover of Qualcomm, citing the importance of its 5G know-how.

Futurum Research’s Daniel Newman says the same.

Bottom Line for QCOM Stock

None of the products or unspoken governmental support will alter the inevitable reality Qualcomm has been postponing for years. That is, its business model has more than pushed the envelope of what constitutes overly restrictive practices. Even if successful with its appeal (which is statistically unlikely), the company has managed to make multiple enemies … even if they appear to be partners on the surface.

It’s overly pessimistic to fear Qualcomm can’t or won’t overcome this headwind, though. As Futurum’s Newman added to his bullish case, “Qualcomm intellectual property is still the best. Apple settled on the merits of its agreement with Qualcomm, knowing full well that this ruling would have helped its case. It knew no other company could support its ambitions in 5G and mobile technology.”

There’s also the mostly overlooked possibility that the more affordable (and less exclusive) Qualcomm’s IP becomes, the more customers it may attract.

In that light — and given that shares had already moved to a price above $90 earlier this month — the consensus target of $96.59 still doesn’t seem unreasonable. One just has to be willing to take a step back and look at the bigger picture to realize the recent drop was sparked more investors looking through an overwhelmingly pessimistic lens.

An end to the ban on doing business with Huawei could end up being a rebound catalyst.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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