Qualcomm’s (QCOM) Win Could Lead to Favorable Settlement With Apple (AAPL), Says Analyst

On Monday, a Chinese court approved US chipmaker Qualcomm’s (QCOM) request for an injunction against Apple (AAPL), which now faces a ban on importing or selling some iPhone models in the country. While Apple quickly filed an appeal, this is part of an ongoing legal battle across multiple countries between the two tech giants, with another ruling (in Germany) expected to come next week. Qualcomm is also in a royalty battle with Chinese phone maker Huawei.

Canaccord Genuity analyst Michael Walkley sees the news as a win for Qualcomm and believes the company will settle with both Apple and Huawei. The analyst reiterates his Buy rating and $75 price target. (To watch Walkley’s track record, click here)

Apple was paying Qualcomm about $10 in royalty fees per iPhone for use of their technology before it stopped payment. Walkley believes that “ongoing legal and ITC cases…could facilitate Apple and Qualcomm finally reaching a resolution on the ongoing royalty disputes.” The analyst estimates a settlement would result in Apple resuming paying Qualcomm but “lowering its net royalty payments…by 50% per iPhone.” The analyst believes the recent China ruling “demonstrates the strength of Qualcomm’s patent portfolio,” which should provide leverage for Qualcomm in its fight against Apple and Huawei.

The analyst expects Qualcomm’s EPS to increase substantially from a settlement with Apple and Huawei, even at a 50% discount from what Apple was previously paying. Without royalty payments the analyst estimates FY2020 EPS at $4.55 but sees “a realistic outcome” of this increasing to $6.23 with “royalties from Huawei and assuming Apple settles at a 50% discount to previous iPhone royalties.”

Aside from the royalty dispute with Huawei and Apple, Walkley believes Qualcomm is poised to continue growing in FY2020 and beyond. The analyst says, “Qualcomm can build off its strong share for its Snapdragon 700 and 800 series to drive ASP and margin expansion.” Walkley adds “we believe Qualcomm will generate much stronger QCT margins in 2H/F2019 and could return to over 20% EBT margins once 5G smartphones ramp longer term.”

Overall, Wall Street is optimistic about Qualcomm’s future. TipRanks analysis of 19 analyst ratings on the company shows that 10 analysts recommend Buy, while nine recommend Hold. The average price target is $69.57, representing a 21.5% upside to its current price. (See Qualcomm’s price targets and analyst ratings on TipRanks)


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