UBS On The Qualcomm-NXP Deal: 'Significant Uncertainties Persist'

Analysts at Deutsche Bank reinstated coverage of QUALCOMM, Inc. QCOM with a Hold rating and $62 price target amid "significant uncertainties" surrounding the $38 billion acquisition of NXP Semiconductors NV NXPI and ongoing legal dispute.

Qualcomm should be applauded for its deal to acquire NXP given the strategic merits, a better diversified product line, and significant accretion, Deutsche Bank's Ross Seymore noted. At the same time, Qualcomm faces many integration challenges as the company shifts from a fabless semiconductor to a fab-lite IDM.

Meanwhile, Qualcomm's ongoing dispute with Apple Inc. AAPL will likely be "hard fought" by both companies and last until at least the end of 2017. Nevertheless, the relationship between the two companies is viewed as "too important to fail" and a settlement is the likely outcome and consist of lower royalty rate for Apple.

The analyst's financial models doesn't assume any "catch up payments," which implies that any unexpected payment from Apple to Qualcomm will result in an increase to estimates.

The Numbers

Qualcomm's revenue/pro-forma earnings per share estimates for 2017 stand at $22.5 billion and $3.86, respectively. These numbers are 1 percent and 10 percent, respectively, below estimates as it assumes no resolution to the ongoing licensee disputes. The analyst's 2018 revenue and PF EPS estimates stands at $32.2 billion and $5.50, respectively.

A $62 price target is based on the analyst's 11x multiple on his 2018 non-GAAP EPS which stands below the large-cap semi peer average of 18x to account for the "significant uncertainties."

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