Qualcomm (QCOM) stock skyrocketed over 50% last month after the chip giant came to a settlement with Apple (AAPL), granting Qualcomm licensing rights while becoming the 5G supplier for iPhone. That was a huge win for Qualcomm, and investors thought this would help pave the way for an expected settlement with Chinese mobile company Huawei, on a similar royalties issue. But that isn’t expected to come anytime soon, as the US Commerce Department recently added Huawei to its “Entity List,” which prohibits US companies from supplying technology to their Chinese counterparts (without a license). But where there’s a rule, there’s an exception — some companies will continue working with Huawei with a temporary license.
While Canaccord analyst Michael Walkley doesn’t believe the ban will have a major impact on Qualcomm’s bottom line, he believes it could delay the settlement between the two. Nevertheless, the analyst reiterates his Buy rating on QCOM stock with $105 price target, which implies over 50% upside from current levels. (To watch Walkley’s track record, click here)
While much has been made about a settlement between Qualcomm and Huawei, Walkley sees this as overblown. The analyst says the China phone maker actually doesn’t contribute much to the semiconductor giant, relative to other companies like Apple. He believes “Huawei represents a minor customer for [Qualcomm],” and actually sees “[Huawei’s] losing share in the handset market [as] a net positive for Qualcomm as that share loss is likely to handset OEMs that are paying full device royalties to Qualcomm and to potential QCT customers versus Huawei primarily using its own solutions.”
Walkley believes Qualcomm will receive $150 million of partial payment from Huawei as outlined in Qualcomm’s guidance, but he know longer assumes “Qualcomm reaches a long-term royalty settlement agreement with Huawei.” Looking ahead, he estimates F2021 EPS of $7.52 without the agreement, as opposed to about $8.00 with it. The near-50 cent contribution of a settlement is about one-quarter of the contribution by Apple, which Walkey expects to generate an additional $2 of EPS, including as the iPhone’s 5G supplier.
Unfortunately, that isn’t the only thing on investors’ minds right now. Qualcomm stock is tumbling 10% today after a U.S. judge ruled that the company unlawfully suppressed competition in the market for cellphone chips and used its dominant position to impose excessive licensing fees.
All in all, Wall street analysts remain bullish on QCOM stock. TipRanks analysis of 21 analyst ratings shows a consensus Moderate Buy rating on the stock, with 15 analysts saying Buy and six Holding. The average price target among these analysts stand at $93.76, suggesting the stock has 32% upside from current levels. (See QCOM price targets and analyst ratings on TipRanks)