The stormy relationship between Qualcomm (NASDAQ:QCOM) and Apple (NASDAQ:AAPL) has been something of a fatal attraction — but Macquarie analyst Srini Pajjuri believes that with three cases coming up for trial, probability of an Apple settlement is higher than ever.
Even if no settlement is reached, Pajjuri sees multiple catalysts ahead for the stock and believes the risk/reward is attractive at these levels. As such, the analyst joins the bull’s camp, upgrading QCOM from Neutral to Outperform, while boosting the price target to $84 (from $65), which implies an upside of 20% from current levels. (To watch Pajjuri’s track record, click here)
Pajjuri opined, “We expect the recent payment by the other licensee in dispute (Huawei) to pave way for a final settlement in the not too distant future. On the Apple front, at least 3 cases are coming to trial in the next 6 – 9 months, which significantly increases the odds of a settlement, in our view. All three cases (ITC, Germany, China) seek injunctive relief, with an initial determination from the ITC due on September 14. We believe an injunction is less likely, but expect the news flow from these trails to favour QCOM. In addition, QCOM’s recent decision to lower the ASP cap and offer SEP-only option should make licensing terms more reasonable for Apple. Apple’s settlements with Ericsson (2015) and Nokia (2017) suggest that its contention is about rates rather than about validity of patents. We estimate QCOM’s FY19 EPS targets already embed ~20% cut to royalty per device, and believe further risk, if any, is modest.”
“Apple settlement could be $0.50 – $0.80 higher than management’s original target of $1.50 – $2.25 (which assumed no buybacks in case of NXP closure). As such, we see an FY20 EPS potential of $8.50 with a settlement,” the analyst added
Net net, Wall Street sizes up QCOM as a ‘Moderate Buy’ stock, as the bulls edge out the cautious on the chip giant. In the last 3 months, the stock has received 9 bullish ratings versus 4 analysts hedging their bets, and one bear who doubts the company can secure a turnaround. Yet, the consensus price target hints at caution baked into expectations here. The 12-month average price target of $69.50 reflects a slight downside potential. (See QCOM’s price targets and analyst ratings on TipRanks)