For Qualcomm, Now Comes The 'Really, Really Hard Part'

Qualcomm, Inc. QCOM posted a strong earnings beat Wednesday, reflected in the stock’s 6.2-percent higher opening on Thursday.

Earnings per share came in at $1.01 versus analysts’ 71-cent consensus estimate. Sales of $5.6 billion beat estimates by over $400 million.

Despite the beat, Qualcomm’s near-merger with NXP Semiconductors NXPI stole the show. The deal was terminated after the companies failed to get a green light from Chinese regulators.

Bulls And Bears

• KeyBanc Capital Markets analyst Michael McConnell maintained an Overweight rating on Qualcomm and raised the price target from $65 to $72.
• Stifel’s Kevin Cassidy maintained a Hold rating and raised the price target from $54 to $58.
• Morgan Stanley’s James Faucette reiterated an Underweight rating and $55 price target.
• Fellow Morgan Stanley analyst Craig Hettenbach also came out with commentary on NXP, maintaining an Equal-Weight rating on the stock and cutting his price target from $127.50 to $105.

The Thesis 

Ivan Feinseth of Tigress Financial also weighed in on Qualcomm in his morning newsletter. Although Feinseth was supportive of the NXP acquisition and expected it to go through, the analyst said he remains bullish on Qualcomm. The company is one of the future big winners from the buildout of 5G and growth in wireless devices, he said. 

KeyBanc's McConnell touched on the same notes named three reasons to be bullish on Qualcomm:

The company boasts an approximately 4-percent dividend yield.

The market has likely ascribed zero value to catch-up royalty payments from licensees that Qualcomm is in disputes with.

Now that the NXP deal has fallen through, the company will pursue a $30-billion share buyback, driving EPS accretion in 2019.

As Morgan Stanley's Faucette said, the buyback will leave Qualcomm with $15 billion in net debt.

For NXP’s part, Hettenbach highlighted the $2-billion break-up fee Qualcomm will pay. The Dutch semiconductor maker has up to $7 billion in buyback power, but it’s unclear how aggressive management will be, the Morgan Stanley analyst said. 

Looking beyond the deal, Stifel's Cassidy was encouraged by to learn that one of Qualcomm’s licensees — the analyst suspects Huawei — made a $500-million good faith payment. The payment is only a fraction of the sum that's due, but it could signal a resolution in the coming months, the analyst said. 

While progress has been made on one front, things have only gotten worse on another. Qualcomm now expects Apple Inc. AAPL to completely abandon the supplier for the next iPhone releases, according to Morgan Stanley. 

In Faucette’s view, removing Qualcomm from its product roadmap entirely puts Apple in a position to continue withholding royalties. Other original equipment manufacturers might be emboldened to do the same.

“We think Qualcomm likely can’t be bought, can’t diversify faster and probably can’t find much leverage,” Faucette said in a note.

Price Action

Qualcomm was trading 7.12 percent higher at $63.66 at the time of publication Thursday afternoon. NXP Semiconductor shares were down 5.82 percent at $92.64.

Related Links:

The Qualcomm-NXP Semiconductors Saga Has Finally Come To An End

Investors 'Wait With Baited Breath' Following Conflicting Reports On Qualcomm-NXP Deal

Photo courtesy of Qualcomm.