Wall Street Might Still Be Underestimating The Impact Of Qualcomm's Spat With Apple

Two months after QUALCOMM, Inc. QCOM lowered its fiscal third-quarter revenue guidance by $500 million, Wall Street may still have its expectations too high. In April, Qualcomm lowered its guidance after iPhone partner Apple Inc. AAPL informed Qualcomm it would be withholding royalty payments until the two companies’ five-year licensing dispute is resolved.

The guidance cut prompted Wall Street to adjust its earnings estimates for Qualcomm, but the Street may still be misjudging the potential impact of the Apple dispute, Bernstein analyst Stacy Rasgon wrote Wednesday. While most Wall Street firms lowered their revenue estimates for Qualcomm by roughly $500 million for each of the next four quarters, Rasgon says Qualcomm’s iPhone revenue isn’t typically so evenly distributed. By the December quarter, the Apple dispute could have much more than a $500 million impact, Rasgon wrote (check out his track record here).

In addition, he noted the Street’s estimate revisions soften in 2018, suggesting a resolution to the dispute. Bernstein in not so optimistic and has revised its fiscal Q2 2018 revenue estimates for Qualcomm down by $788 million.

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Not only is Qualcomm at risk of a prolonged dispute with Apple, Rasgon said it is also at risk of losing share to competitors in the 2018 iPhone.

“There remain other risks and issues including potential for further design losses in next year's iPhone as competitors bring up CDMA, $1B+ in stock comp should one choose to account for it, ~$11/share in net cash shortly becoming ~$16/share in net debt, and increasing likelihood that NXPI will cost more given activist involvement, strong results, and sector performance that has fully offset the deal premium,” Rasgon wrote.

For now, Bernstein remains on the sidelines until Apple and Qualcomm can provide more clarity on the situation. The firm maintains a Market Perform rating and $60 price target for Qualcomm.