Shares of Qualcomm (QCOM) are on the rise for a second day in a row after the company and Apple (AAPL) announced an agreement yesterday to dismiss all litigation between them. The deal involves a direct license between Apple and Qualcomm with a six-year term, effective as of April 1, with a two-year option to extend. Following the news, JPMorgan and Evercore ISI upgraded Qualcomm to buy-equivalent ratings, while several other Wall Street analysts raised their targets for the stock. Also discussing the deal, KeyBanc analyst John Vinh told investors that he believes challenges at Intel on its 5G modem were "a key factor" leading to the Apple/Qualcomm settlement.
QUALCOMM, APPLE SETTLEMENT: On Tuesday, Qualcomm and Apple announced an agreement to dismiss all litigation between the two companies worldwide. The companies also have reached a six-year license agreement, effective as of April 1, including a two-year option to extend, and a multiyear chipset supply agreement. Apple will pay royalties to Qualcomm and the settlement includes a one-time payment from Apple to Qualcomm, the company stated. According to Qualcomm, the agreement "contributes to increased stability" for the company's licensing business and "reflects value and strength of Qualcomm's intellectual property.” Qualcomm expects incremental earnings per share of about $2.00 as product shipments ramp.
'OVERWHELMINGLY POSITIVE' DEAL: In a research note to investors, JPMorgan analyst Samik Chatterjee upgraded Qualcomm to Overweight from Neutral and raised his price target on the shares to $88 from $54. The analyst believes the settlement with Apple appears to be "overwhelmingly positive for Qualcomm despite the absence of details at this time," and sees the deal opening up the opportunity for Qualcomm to resume chipset supply to Apple. Also more bullish on Qualcomm, Evercore ISI analyst C.J. Muse upgraded the stock to Outperform from In Line and raised its price target on the shares to $90 from $60 following the settlement with Apple. The analyst told investors that he expects Qualcomm's earnings power to move "considerably higher" with incremental earnings of $2 from Apple and that he sees normalized earnings of $6.50-$7 into fiscal year 2021, when including Huawei payments and buybacks.
TARGETS UPPED: Following the news, Mizuho analyst Vijay Rakesh raised his price target for Qualcomm to $82 from $62 saying the settlement will be an "immediate bump" to QTL license revenue starting in the June quarter for the company, while the new six-year license agreement provides a 5G opportunity at Apple. Rakesh reiterated a Buy rating on Qualcomm shares. Voicing a similar opinion, his peer at Canaccord also upped his price target for Qualcomm to $89 from $75, while keeping a Buy rating on the shares. Analyst T. Michael Walkley said he assumes Qualcomm will start supplying 5G modems for future iPhone generations with sales beginning to ramp in the fourth quarter of 2020. Additionally, Argus analyst Jim Kelleher and Rosenblatt analyst Jun Zhang raised their price targets for Qualcomm to $95 and $84, respectively, while reiterating Buy ratings on the stock.
MEANINGFUL SHARE LOSS: Noting that the two-year legal battle between Apple and Qualcomm resulted in Intel gaining about 50% share in new iPhone SKUs in 2017 and 100% share of new SKUs in 2018, Credit Suisse analyst John Pitzer told investors that while he sees little risk to Intel's 2019 Apple Revenue as modem sockets are determined 9-12 months in advance, he sees the potential for meaningful share loss in 2020 especially in the second half of the year as Apple ramps 5G SKUs. Nonetheless, Pitzer reiterated an Outperform rating and a $58 price target on Intel shares. Meanwhile, his peer at KeyBanc pointed out that he believes challenges at Intel on its 5G modem were "a key factor" leading to Apple/Qualcomm settlement. Analyst John Vinh also said he thinks this settlement likely will lead to a Huawei settlement, which could add another 80c in EPS for Qualcomm. While Vinh views the settlement as encouraging and as removing a major overhang for Qualcomm, he remained Sector Weight as he believes the economic benefit from the Apple settlement is largely reflected in the stock.
INTEL TO EXIT 5G SMARTPHONE MODEM BUSINESS: Just hours after Apple's announcement, Intel shared its intention to exit the 5G smartphone modem business and complete an assessment of the opportunities for 4G and 5G modems in PCs, internet of things devices and other data-centric devices. Intel also said it will continue to invest in its 5G network infrastructure business and will continue to meet current customer commitments for its existing 4G smartphone modem product line, but does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020. Commenting on the news, KeyBanc analyst Weston Twigg told investors that continued investment in its low-margin modem business made "little strategic sense" amid fab capacity constraints. Twigg does not expect this to impact Intel's 2019 outlook, though it is possible that it could improve the company's longer-term revenue and margin profile.
PRICE ACTION: In morning trading, shares of Qualcomm have gained over 12% to $79.19, while Apple's stock has advanced about 1% to $201.06. Also higher, shares of Intel have risen almost 4% to $58.76.