After a blue deal, two plus years of litigation, Apple (NASDAQ 🙂 and chip maker Qualcomm (NASDAQ 🙂 surprised the markets yesterday by settling their differences out of court a few hours after the long-awaited trial began. Although Apple's stock did not respond to the news, Qualcomm's share increased and reached 31%, including a 6% increase in post-trading hours.
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The original lawsuit filed in January 2017 claimed that Apple violated Qualcomm patents by not paying any royalty; Apple – which was one of Qualcomm's biggest customers at the time – claimed that they had been overloaded with those patents for years. In addition, Apple claimed that Qualcomm used unfair trading practices, including the use of its position as a leading manufacturer of baseband chips, to prevent customers from purchasing parts from competing suppliers, forcing customers to license Qualcomm's patents to gain access. get to his chips. In this way, the chip maker gained income from the sale of chips and patent licenses.
A lawsuit brought by a company's most important customer is not a trivial matter, perhaps not even when that customer is the observant, high-profile manufacturer of the iconic iPhone
AAPL versus QCOM 2017-2019
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Indeed, the past two years have been extremely painful for Qualcomm. From the point of view of its share price, the Qualcomm share has been trading below the $ 65 level for most of the last two years, where it was when the lawsuit struck. During that period, stocks sank as low as $ 49, a loss of 25%.
Apple, on the other hand, continued its upward trajectory in the same period and even became the first company to reach a value of $ 1 trillion.
Why was this lawsuit so much more harmful to Qualcomm than to Apple? From a fundamental point of view, license revenues are an important part of Qualcomm's business model, and Apple threatened to completely defuse that income by having the court dismantle Qualcomm's business model
Apple also withheld approximately $ 8 billion from Qualcomm while the suit was underway, while searching for components for its iPhone elsewhere, causing Qualcomm & # 39; s revenue to fall by 20% compared to the same quarter a year earlier.
Details of the settlement are still unclear. Both companies published short press releases indicating that Apple had terminated all its ongoing disputes with Qualcomm and that the two companies had concluded a six-year license agreement, a multi-year chipset delivery agreement, and that the settlement included an undisclosed payment from Apple to Qualcomm. Qualcomm said the deal is likely to add about $ 2 in earnings per share.
If Apple was barely affected by the dispute, why the sudden settlement? The answer: the dominance of Qualcomm in the 5G mobile technology arena.
The successor to the current 4G, the newer 5G technology, enables a much faster transfer of data between phones and masts, enabling a faster internet connection on mobile devices. More importantly, perhaps, Qualcomm, is one of only a handful of companies (along with Huawei (SZ :), MediaTek (TW 🙂 and Samsung (KS :)) that offers chips with 5G capabilities.
As a world leader in smartphone innovation, Apple and Qualcomm have just as much as the chip manufacturer needs, unless Apple starts developing their own modem chips. Apple cannot allow its devices to lag behind the competition, especially at internet speed, and Samsung & # 39; s new Galaxy S10 5G is already on the 5G track.
Yesterday's settlement allows Apple to return to normal with no extra distractions. On the other hand, the future of Qualcomm now looks much brighter.
With the largest customer back, revenues and revenues should receive a serious boost. Plus, right after the settlement was announced, Intel (NASDAQ 🙂 said it would drop out of the 5G race, making Qualcomm the only major 5G player. Now that the legal issues have been resolved, we think that $ 100 per share is well within Qualcomm's reach