Morningstar | Better Late Than Never: Qualcomm Reaches Settlement With Apple; No Change to $72 FVE for QCOM
On April 16, Qualcomm and Apple agreed to drop all ongoing litigation against one another (as well as Apple’s contract manufacturers), while reaching a six-year license agreement, effective April 1. The settlement also includes a payment from Apple to Qualcomm to compensate for the missed royalty payments since the dispute began in January 2017. We estimate Qualcomm did not receive royalties on roughly 400 million iPhones sold by Apple over that period, which equates to roughly $3 billion in licensing revenue if using a $300 transfer price and 2.5% royalty rate. In addition to Apple resuming royalty payments to Qualcomm, the two firms also reached a multiyear chipset supply agreement, which we believe validates Qualcomm’s leadership in 5G modems (particularly versus Intel). We don’t believe this development will have a material impact on Intel, as Apple will still likely use Intel modems for its 2019 iPhone models, and we think the modem business was dilutive to Intel’s overall margins. Concerning Apple, we still expect the firm to work on internal development for its modems, as recent reports have suggested, but we don’t believe there is an imminent threat to Qualcomm’s modem leadership.This settlement is consistent with our unchanged thesis that Qualcomm would maintain its licensing business model. Notably, Qualcomm expects incremental earnings per share of $2 as product shipments ramp. We note this incremental EPS is likely on a normalized basis. We expect further color on the amount of the one-time payment from Apple, timing on incremental EPS, and other details during Qualcomm’s upcoming second-quarter earnings call on May 1. Shares of Qualcomm spiked 23% toward our unchanged fair value estimate of $72, which we will revisit as we digest additional details regarding the resolution. We are maintaining our $200 and $65 fair value estimates for narrow-moat Apple and wide-moat Intel, respectively.
We believe narrow-moat Qualcomm can now put this issue behind it and focus on its organic growth prospects in 5G and automotive.
Intel is a data-centric company. The company's operating segments are: Data Center Group, which develops platforms for compute, storage, and network functions; Internet of Things Group, which facilitates its customers creating, storing, and processing data; Mobileye, which provides assistance and automation solutions; Non-Volatile Memory Solutions Group, which provides memory and storage products based on Intel? Optane? technology and Intel? 3D NAND technology; Programmable Solutions Group, which provides programmable semiconductors; and Client Computing Group, which connects people to data, allowing each person to focus, create, and engage in ways that unlock their individual potential.
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