Morgan Stanley Upgrades Qualcomm On Earnings Multiple Expansion Opportunity

QUALCOMM, Inc. QCOM is up nearly 50 percent in the last five trading sessions since announcing a settlement with Apple, Inc. AAPL. One Wall Street analyst said now is not the time to be cashing out of Qualcomm.

The Analyst

Morgan Stanley analyst James Faucette upgraded Qualcomm from Equal-Weight to Overweight and raised his price target from $55 to $95.

The Thesis

Despite the bullish knee-jerk reaction by the market, Faucette said Qualcomm shares still trade at a valuation discount to its semiconductor peer group. Over time, he said investors can expect the stocks multiple to expand to close that valuation gap, driving the share price even higher.

“We see new opportunities and optionality as more attractive than risks potentially overlooked by any near-term settlement-induced euphoria,” Faucette wrote in a note.

Faucette said Qualcomm’s opportunities in the 5G market aren’t priced into the stock at this point, making it akin to a cheap option for investors.

In the meantime, Faucette said payments from Apple will dramatically improve Qualcomm’s balance sheet. He said Qualcomm may even be able to completely eliminate its roughly $5 per share in net debt.

Given the nature of Qualcomm’s business, Faucette said investors will always have to deal with a certain degree of headline risk. However, he said the Apple news reinforces the idea that product performance and intellectual property value will always matter in the market.

Price Action

Qualcomm's stock traded higher by 5.2 percent to $86.30 per share following the upgrade and is now up 49 percent year-to-date.

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Photo courtesy of Qualcomm.