Morgan Stanley Breaks Down Qualcomm's Best Legal Strategy With Apple

QUALCOMM, Inc. QCOM is in the middle of some messy litigation related to its chip pricing. According to one Wall Street analyst, Qualcomm’s legal team and its management should proceed with a two-pronged strategy that is good for investors and for profits.

The Analyst

Morgan Stanley analyst James Faucette has reiterated an Equal-weight rating and $55 price target for Qualcomm.

The Thesis

Confusion over the difference between Qualcomm’s standard essential patents/IP and its non-essential patents/IP has impacted media coverage over the ongoing FTC lawsuit and maybe even the FTC’s legal arguments themselves.

The FTC has said it would like to force Qualcomm to license essential IP according to principles of fair, reasonable and non-discriminatory licensing, but Faucette said Qualcomm has already demonstrated its willingness to do so in China and with Apple, Inc. AAPL. In that respect, Faucette said the FTC’s demands are both confusing and potentially troubling, and he said the Qualcomm defense team should make sure to clearly differentiate between essential and non-essential patents as part of a two-pronged strategy.

“As the FTC trial and other cases move into critical phases, we think that the company must make a more compelling case for the value of its non-essential IP, and why maintaining control over its use and pricing is both legal and appropriate,” Faucette wrote in a note.

Faucette said if Qualcomm can establish the difference between essential and non-essential IP in non-licensed phones in ongoing patent cases in China, Germany, the U.S. and elsewhere, there could be significant upside to Morgan Stanley’s $55 target for the stock. If the company fails in doing so, he said the stock could have downside to $40.

Price Action

Qualcomm's stock traded at $54.72 Thursday afternoon.

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Photo courtesy of Qualcomm.