Qualcomm (QCOM) stock has been on its biggest tear in nearly 20 years since the litigation risk emanating from Apple (AAPL) has finally come to a resolution.
After the sustained surge, the stock is set for its highest open in nearly five years if pre-market highs hold.
"The settlement includes a payment from Apple to Qualcomm," a joint press release specifies. "The companies also have reached a six-year license agreement, effective as of April 1, 2019, including a two-year option to extend, and a multiyear chipset supply agreement."
Qualcomm management expects a $2 per share earnings increase from the deal as iPhone production ramps. The deal should also serve to defend the company's buyback plan and hefty dividend.
The overwhelming enthusiasm on the stock is motivating widespread target price raises and upgrades on Wall Street. The shift in models has brought the consensus price target up from around $63 per share to nearly $78.
"In our view, the settlement removes significant legal risk for Qualcomm and also clears the way for a settlement with the FTC," Stifel analyst Kevin Cassidy said. "We believe the removal of the legal overhang, which had persisted for the last two years, allows investors to focus on Qualcomm's core businesses which will drive a higher valuation in addition to higher earnings power. We view Qualcomm as the clear leader in 5G modem technology which should begin to ramp through the second half of 2019 and 2020."
Based on the erasure of the overhang, Cassidy upgraded the stock from "Hold" to a "Buy" and raised his price target from $57 to a whopping $100.
The armistice between Apple and Qualcomm comes after a contentious two-year battle over patents and payments that effectively stretched across every market the two companies operate in. Before the deal was announced, Qualcomm stock was down about 10% since the opening of litigation on January 20, 2017.
Apple, in the end, may not have had a choice as Intel's (INTC) 5G efforts fell flat and were due to be delayed.
Intel likely decided they didn't want to be in the modem business as new management took over. That was likely the first ball to drop.
Apple saw the writing on the wall and needed to settle sooner than later.
All the days events feel very coordinated.— Ben Bajarin (@BenBajarin) April 16, 2019
"Big picture, today's settlement and multi-year chipset supply agreement means that Apple is better positioned for the upcoming push to 5G, which has become a pressing topic after reports in early April indicated Intel, the sole supplier of chips for the iPhone XR, XS and XS Max, has been 'missing deadlines' for the development of their 5G chip, and MediaTek (MDTKF) , Samsung (SSNLF) and Huawei were all but ruled out as potential 5G modem suppliers, leaving Apple in limbo for a 5G chip supplier for their fall 2020 iPhone launch," Morgan Stanley analyst James Faucette said.
Qualcomm, by contrast, has already introduced its third generation 5G modem and is prepared for the push into the next generation of smartphone technology.
To be sure, Qualcomm is still contending with an FTC case over exorbitant royalties charged to handset makers that had effectively no bargaining power. The case is still waiting to be heard in the Northern District of California, which could shake up the company's business model despite the Apple settlement.
However, that case may not have a leg to stand on any longer, adding to the roll-off of legal issues igniting shares this week.
"This is separate from the FTC case that is examining Qualcomm's QTL business model, though we see it as unlikely the company is dealt a significant blow following today's developments," Cowen analyst Matthew Ramsay said. "Apple had been a key driver of the FTC case and a potential important witness for the government."
Without a key witness, the case is significantly weakened. Ramsay added that he believes an "imminent settlement" is likely with Huawei as smartphone makers could simply capitulate after Apple's settlement. He estimated the Huawei deal could add another $0.75 to EPS for the company.
As the company is expected to release earnings on May 1, investors can expect an interesting earnings call that can make or break the bullish trend set by Tuesday's agreement.
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