A Legal Settlement with Winners all Around

The legal battle has its roots in Apple’s supply chain needs.

We’ve been writing about Apple a lot, but the tech giant has been earning the headlines. Apple, Inc. (AAPL – Research Report) is a rare breed of company, that always finds a way to turn adversity into advantage, for the benefit of shareholders. Last week brought us another example of the company’s knack for making any news good news: on April 16, news broke that Apple had resolved its long-running patent and royalty dispute with modem chip supplier Qualcomm.

The legal battle has its roots in Apple’s supply chain needs. The company’s flagship product, the iPhone series, is dependent on high-speed mobile modem technology, and Qualcomm, Inc. (QCOM – Research Report) is the smartphone market’s supplier of the semiconductor chips that make mobile modem tech possible. Qualcomm, quite naturally, charged a high price – in royalties and licensing fees – for use of its chips in Apple’s iPhones.

The dispute boiled down to a desire on Apple’s part to avoid paying Qualcomm’s fees, while making use of the underlying technology in conjunction with other companies’ chips. Qualcomm, of course, saw this as patent infringement. The legal battle involved both suits and counter-suits, and the two parties met in court on April 16 to begin arguments. The settlement announcement came before the lawyers could finish their opening statements.

A Closed Case, and an Undisclosed Settlement

At first glance, the settlement favors Qualcomm. It includes a sum of money – the exact amount remains sealed – to be paid by Apple, and a six-year agreement chip use and licensing fees, with an option to extend for two years. On its face, the settlement gives Qualcomm a guaranteed customer for six to eight years.

There are gains for Apple, however, although they may not be as readily apparent. Most importantly, Apple has managed to limit its costs going forward. By locking in the supply of modem chips, Apple can avoid potential price hikes in the medium term, or protracted negotiations to secure a new supplier. And by accepting a legal settlement now, Apple has avoided the potentially higher fee and penalty payments that an adverse court verdict would have entailed.

Market traders and Wall Street analysts took note of the settlement announcement, and the immediate results are in line with the facts outlined here: both companies saw gains, with Qualcomm seeing the greater immediate benefit. Let’s dive into TipRanks’ analyst data, to see where both stand today.

Apple’s Market Position

In the two trading sessions after the settlement announcement, Apple shares rose $4, a modest gain of 2%. That small boost, however, comes after three months of gains, which have brought Apple shares back above the $200 mark for the first time since November. Coming so soon after Tim Cook’s presentation of Apple’s upcoming new services – Apple TV, Arcade+, Apple Card – the legal settlement is perceived as resolving a distraction.

 The analysts have noted all of this. Wedbush’s Daniel Ives (Track Record & Ratings), who regularly follows AAPL shares, said after the settlement announcement, “While Qualcomm expects a more meaningful financial impact, Apple can also rest a little easier, as the risks of 5G and settling with Qualcomm take an overhang away from the name.” Ives gives AAPL a $225 price target, suggesting a 10% upside from current levels.

Also weighing in is five-star analyst Jim Kelleher (Track Record & Ratings), of Argus, who also gives AAPL a $225 target. He notes, “the company's comprehensive legal settlement and new supply agreement with Qualcomm should benefit the shares. The decision to settle was driven by the realization that Apple may miss out on the 5G phone cycle upgrade…” Kelleher also points out an unremarked fact about the costs of simply paying Qualcomm’s royalty: “The cost burden for Qualcomm chip and licensing is not too severe, and is estimated to be below $25 on devices that may retail for over $1.1K.”

Overall, Apple is in a strong position in the markets. Its stock is rising, the company has made public a plan for forward growth and compensation for slowing iPhone sales, and has disposed of a bothersome legal issue. Apple’s ‘Moderate Buy’ analyst consensus is based on 17 buy ratings and 13 holds given over the past three months – by the best performing Wall Street analysts. The current share price is $203, actually higher than the average price target of $198, but as noted, the most recent price targets given suggest there is room for a 10% upside.

Analyst Price Target on AAPL

Qualcomm’s Gains

Qualcomm has definitely come out ahead in the legal dispute. They are receiving a settlement payment from Apple, a result that is normally associated with a legal victory, and as noted above, they have locked in Apple as a chip customer – an important feat when you remember that iPhone commands an 18% market share worldwide.

Writing from Susquehanna, Christopher Rolland (Track Record & Ratings) says, “While Apple details and an FTC judgment remain, this is a huge step forward for Qualcomm, a company making silent progress behind lawsuit headlines.” He gives QCOM stock a price target of $95, indicating a potential 19% upside for the shares.

Also taking a bullish stance on Qualcomm is Michael Walkley (Track Record & Ratings), of Canaccord Genuity. He writes, “Qualcomm will start supplying 5G modems for future iPhone generations with sales beginning to ramp in 4Q20. He also notes that the licensing deal between the companies is a device-level licensing deal, which he thinks protects Qualcomm's long-term licensing business model.” Walkley sets an $89 price target, suggesting he sees an 11% upside to QCOM shares.

Qualcomm jumped 38% in share price after the settlement announcement, a clear sign that investors see the legal matter as resolved in the company’s favor. The share price jump also put QCOM at $79, almost at the average target price of $81, and leaving room for just a 1.5% upside potential. But as the analysts quoted above indicate, that price target is likely to rise in the near future. In the meantime, QCOM maintains a ‘Moderate Buy’ rating, based on 17 recent reviews, including 11 buy and 6 hold.

Analyst Price Target on QCOM

Author: Michael Marcus

Disclosure: This author holds a long position in Apple, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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