Qualcomm Looks Ready To Rally For The Rest Of The Year

With an 80% rally off the lows of March already under its belt, Qualcomm (NASDAQ: QCOM) could be forgiven for taking the foot off the gas as investors started to take some profits. However, a 20% jump at the end of last week pushed the stock to fresh all-time highs and signaled its intent to make this a banner year for the semiconductor maker.

Shares had been consolidating after their recovery and trading mostly sideways since June, but the company’s Q3 earnings and management updates after Wednesday’s session lit a flame that looks set to burn for a long time yet. EPS and revenue both came in ahead of expectations but that wasn’t the reason shares jumped 13% in after-hours trading.

Patent Settlement

As part of the report, management announced a juicy settlement with Chinese tech company Huawei which resolves a long-standing patent licensing dispute. Looking ahead to next quarter, past-due royalties to the tune of $1.8 billion will be included in Qualcomm’s revenue while royalties from new Huawei sales in the meantime will also be included. Steve Mollenkopf, Qualcomm CEO, told investors "with the signing of the Huawei agreement, we are now entering a period in which we have multi-year license agreements with every major handset OEM.”

Things are looking good for the $120 billion San Diego based company with shares set to gain again this week. Even before the latest earnings report and updates, Wall Street had been looking at them favorably. Last Monday, JPMorgan added the stock to its Analyst Focus List as a Growth pick. Analyst Samik Chatterjee was bullish on a strengthening 5G outlook and expecting "execution on the 5G content and volume ramp to improve investor confidence on the earnings opportunity and drive re-rating in the shares."

They maintained the stock’s rating at Overweight but upped their price target to $108, a level that looks set to be taken out this week. August has already started strong for Qualcomm with Bernstein upgrading them from Market Perform to Outperform on Monday morning. Analyst Stacy Rasgon expects chip margins to be above 20% next year as a byproduct of Apple’s (NASDAQ: AAPL) accelerating sales in iPhones.

He added “we have certainly had our issues with this company, stock, and management team over the years. But with the Huawei situation settled, their Sisyphean toils seem (for the most part) finished, opening up a cleaner case for investors who, starved for secular stories and looking beyond the near to medium term of the current pandemic, are looking for a 5G pure play”.

Bright Days Ahead

With shares already managing to rally before all of these bullish updates, investors should be excited about what’s possible now that that weight has been taken off their neck. As if to make that point themselves, Bernstein upped their price target to $135, which suggests a 30% move higher from current prices.

The stars seem to be aligning for Qualcomm with a little less than half the year left. Their core markets, 5G, and smartphones, are recovering from the coronavirus pandemic much faster than expected and their topline revenue is about to get a $2 billion injection. Having weathered the worst that the pandemic could throw at it, there’s every reason to think shares will continue to rally through the coming weeks and months as catalysts are realized and new ones emerge.