Summary
- The licensing settlement with Huawei takes a big uncertainty off the table.
- 5G rollout will be a multi-year process encompassing more than phones. Analysts may be underestimating this growth.
- Based on a conservative 2022 EPS of $6.50 and 20 P/E, the stock can trade to $130.
5G Growth And Licensing Deal
Qualcomm (QCOM) produced a big upside surprise when it recently reported fiscal Q3 2020 earnings. Non-GAAP EPS of $0.86 exceeded company guidance of $0.60-$0.80 and represented 8% growth from Q3 2019. The licensing business, QTL, had a 19% decline in revenues. The chip business, QCT, grew revenues, margins, and earnings despite a 17% decline in MSM chip shipments. The company has stated previously that the added content in 5G chipsets produces up to 50% more revenue per unit.
Source: Qualcomm Q3 2020 Earnings Release
Source: Qualcomm 2019 Analyst Day Presentation, CFO Akash Palkhiwala
More importantly, the company settled its long running licensing dispute with Huawei. The Chinese company will pay Qualcomm approximately $1.8 billion as a settlement for unpaid royalties from previous years as well as royalties for 1H 2020 under the new agreement which is retroactive to 1/1/2020. This also means that Qualcomm will resume including Huawei royalty payments in its estimates for 4Q and beyond.
