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Why Qualcomm Stock Skyrocketed 51% in April

Keith Noonan, The Motley Fool

What happened

Shares of Qualcomm (NASDAQ: QCOM) gained 51% in April, according to data from S&P Global Market Intelligence. News that the company had reached an agreement with Apple (NASDAQ: AAPL) regarding intellectual property (IP) licensing fees for chips used in the consumer hardware giant's mobile devices hit in the middle of the month, prompting massive gains for the chipmaker.

QCOM Chart

QCOM data by YCharts.

Qualcomm published a press release on April 16, announcing that the two companies had reached an agreement to their long-standing disputes over licensing rates and alleged patent infringement and are dropping all pending litigation. Many details of the agreement remain unknown, but Qualcomm will receive a back payment related to use of its IP in Apple devices and has also signed a big new deal with the iCompany.

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Image source: Getty Images.

So what

The core known points of the recent agreement between Apple and Qualcomm are found below:

  • A one-time payment from Apple to Qualcomm, estimated to be between $5 billion and $6 billion.
  • A six-year, multichip, direct licensing agreement between the two companies that began on April 1, with an option for a two-year renewal at the end of that period.
  • All litigation between the two companies will be withdrawn.

The rapid gains for the stock on the heels of the truce with Apple forced short-sellers to cover their positions, triggering a short squeeze and helping to send shares even higher.

The announcement of an agreement between Apple and Qualcomm ensures the companies will be working together during the pivotal transition to 5G and looks like a significant blow to Intel. Qualcomm's rival in the chip space has been jockeying to get more of its chips into Apple handsets, but that avenue seems to have less opportunity now, and Intel shares have fallen roughly 10% since the deal.

Now what

Despite recent sell-offs in the market stemming from late-breaking complications in trade talks between the U.S. and China, Qualcomm stock has continued to inch higher in May. Shares are up roughly 2.5% in the month so far.

QCOM Chart

QCOM data by YCharts.

The company reported second-quarter earnings on May 1, delivering results that topped the market's expectations. Sales for the period dipped 6.6% year over year to reach $4.88 billion but topped the average analyst estimate by $57.5 million. Earnings more than doubled compared to the prior-year period to come in at $0.77 and topped the average analyst estimate by $0.06.

Qualcomm shares trade at roughly 23 times this year's expected earnings and have a forward yield of roughly 3% after the stock's big gains.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.