Qualcomm's Apple Quarrel Likely To Remain Overhang Despite Strong Quarter

Walkley stated in a research report that Qualcomm's earnings per share in the second quarter of $1.34 was "well above" his $1.20 per share estimate. In fact, the overall earnings report could have been even more strong if it wasn't for a new licensee dispute stemming from Qualcomm not recognizing $150 million in high-margin QTL revenue.

However, the analyst argued that the despite the strong earnings report, the ongoing quarrel with Apple is showing signs of carrying over well into next year. Specifically, Qualcomm disclosed that Apple's ODM partners including Foxconn and Pegatron underpaid Qualcomm around $1 billion which is the amount Apple believes it is owed relating to a Cooperation Agreement.

Materially Lower Apple Royalty

Walkley noted that Qualcomm's underpayment was due to Apple withholding $1 billion of payments to its ODM partners. In turn, the ODMs under-payed Qualcomm and it remains unclear if Apple will pay the ODMs in full.

As such, the analyst pointed out that Qualcomm's guidance range for the third quarter assumes "some level of underpayment" from Apple's ODM partners although the low-end of the guidance range does assume some royalty payments for iPhone devices.

However, Walkley argued whether Qualcomm recognizes any iPhone-related royalty revenue in the near term; Qualcomm's stock is already assuming "materially lower" Apple royalty payments. This leads the analyst to believe that Qualcomm and Apple will eventually reach an agreement.

"We believe the current share price is assuming some worst case scenario outcomes," the analyst concluded. "Therefore, we believe Qualcomm is an attractive investment opportunity for longer-term investors during this time of uncertainty."

Walkley maintains a Buy rating on Qualcomm's stock with a price target lowered from $76 to $75.

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