The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

My August 2017 prediction came true yesterday. Apple surrendered and settled its modem-related legal dispute with Qualcomm.

Qualcomm shot up 23% during after-hours trading after the April 16 announcement that Apple and Qualcomm completed an out-of-court settlement of their legal battle.

Apple has tons of cash. It can afford to fight years-long of litigation against Qualcomm. Unfortunately, Apple’s current smartphone modem supplier Intel is a laggard in 5G modem design.

Qualcomm previously refused to supply its 4G modems to 2018 iPhones. Apple got scared that Qualcomm will again refuse to supply its 5G modems to 2019 and newer iPhones.

Apple had to capitulate and settle with Qualcomm so it can protect its iPhone business. 5G connectivity is the emerging de facto requirement for luxury smartphones and tablets.



I correctly predicted last August 9, 2017 that Apple (APPL) will settle its modem licensing legal dispute against Qualcomm. It was not a surprise that this hypothesis proved true yesterday. Apple and Qualcomm agreed to drop all their court battles around the world yesterday. They also signed a new 6-year patent licensing agreement that can be extended by another two years.

Qualcomm won – the out-of-court settlement involved “Apple making a payment to Qualcomm.” Being friends with Apple again is a strong reason to go long on QCOM. Qualcomm’s stock rose +23% during after-hours trading. This was right after the April 16 settlement announcement.

Going forward, the licensing payment from Apple and the modem chip supply for iPhones can notably improve Qualcomm’s bottom line. Apple sells expensive phones and tablets. I am sure Qualcomm extracted a good per-device licensing fee on iPhones and iPads.

My guesstimate is that Qualcom’s per-device modem patent licensing fee on $700++ iPhones could be as high as $10. Apple is still capable of selling 100 million units/year of its flagship iPhones. The fees from the patent licensing agreement alone can add $1 billion to Qualcomm’s revenue until 2026.

Why The Stock Rose 23%

Going forward, my guesstimate is that the settlement with Apple can lead to Qualcomm making additional $500 million in annual net income. This can translate to additional annualized EPS of $0. 41. Investors boosted QCOM by 23% last night because the renewed friendship/partnership with Apple will reverse the declining EPS performance of Qualcomm.

The April 16 settlement said Apple paid Qualcomm. We can expect FY 2019’s EPS to be notably higher than past years’ numbers.

Source: Macrotrends

QCOM delivering a 2019 EPS of $2.2 (and using a TTM P/E ratio of 38x) can boost the stock to $80.

The renewed partnership between Qualcomm and Apple compelled Intel to quit the 5G smartphone business. Intel knew Apple is unlikely to use its future 5G smartphone modems. Qualcomm is likely to become once more as the exclusive supplier of modems to iPhones and iPads. This can add another $600 million to $900 million to Qualcomm’s topline.

Why Apple Surrendered

For almost two years, Apple hired lawyers in different countries to fight Qualcomm’s high patents licensing fees. My takeaway is that Apple capitulated to Qualcomm because Intel (INTC) was lagging in 5G modems for smartphones. Intel was scheduled to ship out its 5G smartphone modem in two years. Qualcomm is already to supply its 2nd-generation X55 5G modem this year, in time for 2019 iPhones.

The multi-mode Snapdragon X55 5G modem can offer internet speed up to 7Gbs. We can conclude that the X55 5G modem as the greatest motivating factor why Apple befriended Qualcomm again.

Source: Qualcomm

The out-of-court settlement from Apple was because Tim Cook wanted to protect the stagnating iPhone business. By becoming BFF again with Qualcomm, Apple can keep up with the 2019/2020 5G high-end (but cheaper than iPhones) Android smartphones of Huawei, Oppo, Xiaomi, Vivo, and Samsung.

The iPhone business is still Apple’s biggest source of revenue and net income. As of 1Q 2019, iPhone quarterly sales was $51.98 billion. The iPhone therefore is Apple’s $200 billion/year golden goose that needed every protection.

Source: Statista

Apple had to bow down to Qualcomm because 5G is the emerging standard for smartphones and other web-connected gadgets/appliances. Statista’s chart below estimate that 54 million 5G smartphone subscriptions will be completed by 2020 and 191 million by 2021. Apple has no choice but to surrender so it can use Qualcomm 5G modems for its next iPhone models.

Conclusion

The stock-picking AI forecast engine of I Know First has neutral algorithmic forecasts of Qualcomm’s stock. However, I am rating QCOM as a buy at $70ish price levels. This stock can hit $80 within the next 12 months. It will not only be Apple that is going to use the X55 5G smartphone/IoT modem. Other smartphone/device vendors will likely use this modem in their 5G-enabled phones, tablets, laptops, smart TVs, cars, drones, and VR/AR headsets.

QCOM is also a buy because the company’s ‘no license, no chips’ policy is an effective discipline stick to compel device vendors like Apple to behave. Qualcomm has the best 5G mobile modem right now and customers like Apple have no choice but to satisfy the wireless patents licensing fees requirement of Qualcomm. I love patents licensing fees because they are zero-cost revenue, or pure profit.

I checked the monthly technical indicators and moving averages trend lines. They told me QCOM is a buy right now.

Past I Know First Forecast Success With QCOM

On August 9, 2017 The I Know First predictive algorithm gave a bullish prediction for QCOM with the signal being for the year time horizon at 33.07 and with predictability indicator of 0.74. In 1 year the stock rose impressively by 29.49%.