Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
It's been two weeks now since Qualcomm (NASDAQ: QCOM) announced its ground-shifting legal settlement with Apple (NASDAQ: AAPL) , ending "all worldwide litigation" between the two companies and setting the stage for Qualcomm to begin earning profits off of a "multi-year" "global patent license agreement" and "chipset supply agreement" with the iPhone giant.
We already knew this was big news -- the number of analyst upgrades that followed immediately after the announcement made that clear. Today, we know more precisely how big that news is now that Qualcomm has reported earnings -- and two more analysts have upgraded the stock.
Here's what you need to know.
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Qualcomm released its fiscal Q2 2019 earnings report last night. Among other things, the company said tha t earnings were "above the high end of our estimates" -- $700 million in GAAP profit ($0.55 per diluted share) on revenue of $5 billion. That's more than twice the profit Qualcomm earned in last year's Q2 on 5% lower sales.
We also know that, in addition to the Apple settlement, Qualcomm has apparently reached at least an "interim agreement with Huawei" on royalties and chipset sales, which contributed $150 million in revenue and $0.10 per share in GAAP profit to the quarter. Negotiations with the Chinese smartphone maker are ongoing, and that number could rise in future quarters.
The big news
The biggest news contained in Qualcomm's report, however, concerned additional details on its litigation settlement with Apple. Here's what the company revealed:
On April 16, 2019, we entered into settlement agreements with Apple and its contract manufacturers to dismiss all outstanding litigation between the parties. We also entered into a six-year global patent license agreement with Apple, effective as of April 1, 2019, which includes an option for Apple to extend for an additional two years, and a multi-year chipset supply agreement with Apple. While we continue to assess the accounting impacts of the agreements, our financial guidance for the third quarter of fiscal 2019 includes estimated revenues of $4.5 billion to $4.7 billion resulting from the settlement (which will be excluded from our Non-GAAP results), consisting of a payment from Apple and the release of our obligations to pay or refund Apple and the contract manufacturers certain customer-related liabilities. In addition, our financial guidance for the third quarter of fiscal 2019 includes estimated QTL revenues for royalties due from Apple and its contract manufacturers for sales made in the June 2019 quarter. Our financial guidance for the third quarter of fiscal 2019 also includes $150 million of QTL revenues from Huawei, which represents a minimum, non-refundable amount for royalties due by Huawei while negotiations continue. This payment does not reflect the full amount of royalties due under the underlying license agreement.
Probably the most shocking revelations here are the size of the revenue boost form Qualcomm's deal with Apple -- an additional $4.5 billion to $4.7 billion in the third quarter alone, which would nearly double the revenue the company collected in Q2.
Accordingly, Qualcomm's new guidance for Q3 2019 shows revenue ranging from $9.2 billion to $10.2 billion, and profits surging to $3.57 to $3.77 per share (roughly $3 a share more than the company earned in Q3 2018).
What Wall Street is saying about that -- and what it means to you
Wall Street analysts lost no time explaining what this means to investors, and why it makes Qualcomm stock a buy.
Merrill Lynch said the details from Qualcomm's earnings report led it to "calculate Apple's current royalty at $6-7 per device, which supports management's $2 EPS target from Apple, with an added benefit of $400mn expected annual decline in legal expenses starting in 2020."
Raymond James got even more specific, saying in a note covered on StreetInsider.com (subscription required) that "we believe Apple's licensing payment amounts to $7.50/phone, precisely in line with our view following the settlement."
Merrill believes that this level of profitability justifies a target price of $105 and a buy rating for Qualcomm, valuing the stock at roughly 17 times $6.30 per share in earnings power. Raymond James goes further, with a target of $115 and "strong buy" rating.
Given that most analysts polled on S&P Global Market Intelligence are forecasting 16.5% growth rates for Qualcomm over the next five years (plus a 2.9% dividend yield), I think these are reasonable expectations. Accordingly, I agree with Wall Street on this one.
At $89 a share, Qualcomm stock looks like a buy, and destined to go higher.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .