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Qualcomm: Huawei, Finally!

Aug. 02, 2020 6:27 PM ETQUALCOMM Incorporated (QCOM)AAPL, SSNLF119 Comments


  • The Huawei license deal adds substantial profits for Qualcomm.
  • If not for COVID-19 impacts on smartphone sales, the company would easily top a $7 EPS target.
  • The stock remains cheap with a normalized EPS goal approaching $8.

The FQ3 earnings for Qualcomm (NASDAQ:QCOM) were a side show to the big license deal with Huawei. The wireless technology leader is now firing on all cylinders as 5G reaches full speed boosted by needs for better internet connections outside the office. The stock has rallied to new highs above $105, but my investment thesis still remains bullish here.

Image Source: Qualcomm website

Huawei Trumps 5G

Qualcomm reported FQ3 results and guided toward FQ4 results with a prime focus on the global deployment of 5G. Not surprisingly, the announcement of a patent license agreement with Huawei trumped any news on growing revenues from 5G or any impact from COVID-19.

Huawei agreed to a new settlement agreement that includes a $1.8 billion payment to catch up from amounts not paid starting with FQ3'17 or over 3 years ago. The Chinese smartphone manufacturer had made interim payments of $600 million in FY18 and $450 million in FY19. The total royalty amount for the 13 quarters equates to $2.85 billion or ~$219 million per quarter during the period in doubt.

Using this estimate of $219 million in quarterly royalty revenues from Huawei at pure profits and 1.1 billion shares outstanding, the license deal adds around $0.75 in annual profits to the equation for Qualcomm. Investors should remember that the company had long estimated that the lack of license revenues from both Apple (AAPL) and Huawei for a period cost Qualcomm up to $2.25 in annual earnings per share.

Huawei is very important licensee after becoming the leading Chinese smartphone manufacturer in the last couple of years. The company now competes with Samsung (OTC:SSNLF) for the global leader with 17% market share in Q1.

Source: Counterpoint

Analyst John Vinh of KeyBanc believes the Huawei license deal will lead to an eventual chip agreement similar

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Analyst’s Disclosure: I am/we are long QCOM, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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