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Qualcomm: A "Battered" Buy
02/03/2017 7:00 am EST
The stock plunged as much as 14% in one day in response to the news that Apple (AAPL) filed a lawsuit accusing the semiconductor manufacturing firm of monopolizing the market for mobile phone chips and withholding $1 billion in rebates.
The timing of the filing was curious, as it seemed to piggyback on an FTC complaint filed on January 17 that charged the company with using anticompetitive tactics.
pple then filed another lawsuit in China over fees, requesting 1 billion yuan of damages ($145 million USD).Qualcomm General Counsel Don Rosenberg responded, “While we are still in the process of reviewing the complaint in detail, it is quite clear that Apple’s claims are baseless.”QCOM shares recovered some of the losses, but the progress turned out to be for naught after the company’s fiscal Q1 2017 results release.
QCOM earned $1.19 per share, versus the $1.18 estimate. Sales were $6.0 billion, versus the $6.1 billion estimate. Shares retreated to the week’s low of $53.51.
While results were decent, many analysts had concerns that the risks from Apple were significant. QCOM expects to earn $1.15 to $1.25 per share next quarter, with revenue in the $5.5 billion to $6.3 billion range.
We believe that the risks from the Apple lawsuit cannot be brushed off, and some analysts painted an ominous picture, including one that suggested a possible “severe” EPS impact that could result in a 32% drop in 2017.
At this point, we don’t expect a substantially adverse outcome, especially as this is not Qualcomm’s first rodeo in court. The company is a master litigator and protector of intellectual property. And Apple, for its part, has always been keenly interested in protecting its iPhone margins.
It’s our expectation that following some initial saber rattling and public swipes at each other, QCOM and AAPL will renegotiate a royalty setup that fairly values QCOM’s intellectual property, while also giving AAPL an appropriate margin.
We think the QCOM selloff was overdone and we would look to take advantage of the price dislocation, even as our Target Price has been pared to $77. QCOM trades for 11.6 times earnings and yields 3.9%.
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