There's Substantial Upside In Qualcomm If NXP Deal Closes By Year-End

Analysts at JPMorgan upgraded shares of QUALCOMM, Inc. QCOM from Neutral to Overweight with a price target boosted from $50 to $68 as the company's proposed acquisition of NXP Semiconductors NV NXPI will generate "material fundamental upside."

According to JPMorgan's Rod Hall, the acquisition of NXP Semiconductors by Qualcomm represents a transaction that is highly accretive. Specifically, the analyst calculated 57 percent earnings accretion for Qualcomm. Moreover, the company priced senior unsecured notes just last week at an effective interest rate of 2.67 percent, which was better than what the analyst had used in his valuation models.

Apple Dispute

Hall argued that Qualcomm's favorable interest rate suggests that the company still has good access to the debt market despite an ongoing dispute with Apple Inc. AAPL. However, this doesn't erase the headline risk from the ongoing dispute but the analyst does believe Qualcomm's stock is "discounting a significant amount of this risk now."

Hall also suggested that Qualcomm's next logical step would be requesting a trade injunction against Apple's contract manufacturers but this will be complex and lengthy.

Nevertheless, the analyst believes Apple still sees Qualcomm's baseband capabilities as "valuable," and Apple also believes in an "environment of fair compensation for innovation." As such, Qualcomm and Apple will eventually reach a resolution in the future although no time line was suggested.

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