For the past two years, technology giants Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM) have been entangled in messy, ugly, and expensive litigation regarding Apple’s royalty payments to Qualcomm. That litigation was settled this month and moved QCOM stock. Apple paid Qualcomm several billion dollars and agreed to a multi-year chip supply agreement with Qualcomm that extends up to and potentially beyond 2025.
The stock took off like a rocket ship in response. That makes sense. Qualcomm’s operations have been adversely impacted by Apple-related headwinds over the past two years. Now, those headwinds are gone. With them gone, the beaten-up and pretty cheap QCOM stock needed to move higher.
This move higher is far from over. The narrative and fundamentals over at Qualcomm have been bad for a long time, mostly because of Apple-related headwinds.
Now the narrative and fundamentals project to meaningfully improve not just today, but over the next several years, too. Apple once again becomes a meaningful revenue source for Qualcomm against the backdrop of a global 5G boom. As this happens, QCOM stock will continue to rally from an unusually depressed base.
All in all, I think fundamentals imply that Qualcomm stock has upside to $90 in 2019. As such, with the stock trading below $80 today, now looks like a good time to buy into the big QCOM rally.
The Narrative Is Improving
For the past several years, Qualcomm’s narrative has been a mixed bag that simply wasn’t good enough to put a meaningful and sustainable bid under the stock. The Apple settlement changes all that, and positions the stock for a healthy narrative over the next several years.
Broadly speaking, as I stated in my late 2018 article on QCOM stock, the dynamic at Qualcomm over the past two years has been one defined by an ongoing tug-of-war between Apple-related headwinds and IoT- and AI-related tailwinds. Because Apple historically accounts for a huge chunk of Qualcomm’s licensing revenues, the Apple-related headwinds have simply been too large to allow for much investor excitement surrounding the IoT- and AI-related tailwinds. Consequently, the stock essentially went nowhere.
But, that era is over.
The big news from the Apple-Qualcomm settlement is that the two companies have entered into a six year chip supply agreement. That means that, into 2025, Apple will pay Qualcomm royalties. Over the past two years, Qualcomm hasn’t received those payments. Over the six years, they will get those payments. Thus, a headwind is turning into a tailwind.
Importantly, it’s turning into a tailwind at the perfect time. Behind the scenes, it looks like Apple was forced to settle with Qualcomm because there was simply no one else they could turn to for 5G technology in the iPhone. That’s largely because Qualcomm appears to be in a class of its own when it comes to mobile 5G technology, and that bodes well for the company as we head into a global 5G boom that should lead to a huge boost in Qualcomm sales over the next few years.
Overall, then, Qualcomm’s narrative just got a huge boost and will remain favorable for the next several years. A favorable narrative will help keep QCOM stay on a solid uptrend.
The Fundamentals Imply Upside
The other side here is the fundamentals. Broadly speaking, the fundamentals imply that QCOM stock has runway to $90 in 2019.
The math isn’t hard to follow. Most analysts were looking at $4 in EPS for this year. Management said that the settlement will add roughly $2 in EPS. Thus, 2019 EPS will likely shake out around $6.
That EPS base should grow meaningfully over the next several years. Apple royalty payments will be back in the mix. The global 5G boom should help boost sales everywhere. Plus, the AI and IoT businesses should continue to grow at a healthy pace.
In sum, then, Qualcomm projects as a solid revenue grower over the next several years thanks to renewed Apple tailwinds and the 5G boom. Margins should likewise stabilize and slightly improve. Broadly, that should lead to high single digit profit growth over the next few years. That makes $8 to $9 in EPS seem doable by fiscal 2025.
Based on a semiconductor average 15 forward multiple, that implies a reasonable fiscal 2024 price target for QCOM stock of nearly $130 at the midpoint. Discounted back by 7% per year (three points below 10% to account for the yield), that equates to a fiscal 2019 price target of just over $90.
Bottom Line on QCOM Stock
Blue skies ahead is rare to find in the stock market, but that is exactly what Qualcomm stock is staring at over the next few years. This stock was so beaten up and so depressed for so long because of one negative catalyst. Now, that negative catalyst is gone, and the stock is positioned for a multi-year move higher.
We are in the first inning of that multi-year rally. As such, now seems like a good time to buy and hold QCOM stock for the next few years.
As of this writing, Luke Lango was long QCOM and AAPL.
