Investors cheered last month when Qualcomm (QCOM) - Get QUALCOMM Incorporated Report settled its long-running royalty dispute with Apple (AAPL) - Get Apple Inc. (AAPL) Report . But it wasn't the only complicated legal fight weighing down Qualcomm shares.
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The chip giant is engaged in a similar skirmish with Huawei over licensing fees, and it's one of several moving parts that Qualcomm investors must keep an eye on this week amid an escalating trade conflict between the U.S. and China. After telling employees on Monday that it will stop supplying Huawei until further notice, Qualcomm shares tumbled 5.87%.
Other chipmakers and tech firms, including Intel (INTC) - Get Intel Corporation (INTC) Report , Broadcom (AVGO) - Get Broadcom Inc. Report and Alphabet (GOOGL) - Get Alphabet Inc. Class A Report , have also signaled that they are suspending business with Huawei as the White House prepares for a broader ban on U.S. firms supplying the Chinese electronics giant. Relative to its peers, such a ban could have an outsized impact on Qualcomm.
As of April, investors were hopeful that Qualcomm's settlement with Apple meant that a similar settlement with Huawei was around the corner. Qualcomm shares skyrocketed after announcing the surprise settlement with Apple, and are up 42% since then.
A settlement with Huawei could mean another boost to Qualcomm's earnings. Under an interim agreement with Huawei, Qualcomm recorded $600 million in royalties for fiscal 2018 but noted in a recent investor presentation that the total amount of royalties paid would be higher than that if a favorable settlement is reached. In an April 16 note, Cowen's Matt Ramsay forecast that a settlement with Huawei was "imminent" and would add another $0.50-$0.75 of EPS.
On Qualcomm's most recent earnings call, executives sounded similarly upbeat about a forthcoming settlement with Huawei and its impact on margins going forward.
"One [factor?] will be some of the wind down of litigation, excess litigation spend. The other important one will be top line expansion, as we now add Apple back in and when we resolve Huawei, both of those will be factors driving margin up over time," said David E. Wise, Qualcomm's interim CFO. Executives also suggested that the Apple settlement strengthens Qualcomm's hand in the Huawei negotiations.
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However, this was all before the recent ratcheting up of trade tensions, which have bruised stocks, such as Qualcomm's, that have significant exposure to the Chinese market. Qualcomm earns about two-thirds of its revenue from China, and CEO Steve Mollenkopf told investors in May that it was picking up market share in the region.
Now, progress in the market looks a bit more like a liability.
As noted by RealMoney's Kevin Curran on Monday, the White House's decision to shun Huawei could push a resolution to the Huawei-Qualcomm dispute even further out of reach -- an obvious negative for investors who viewed a resolution as the next big catalyst for the stock.
As one possible good omen, however, Huawei doesn't seem averse to settling patent disputes in general: Just last week, Huawei and Samsung (SSNLF) settled a long-running battle involving more than 40 lawsuits related to smartphone patents.