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Seismic Semi Shifts: QCOM and NVDA

Last week, I did several reports on the battle for sub-10 nanometer supremacy between Intel INTC and Advanced Micro Devices AMD, including this July 29 video and article...

Release the Ryzen! AMD Roars in the Nanometer Wars

That night, Qualcomm QCOM contributed further to the tectonic shifts with a big announcement: they had resolved their patents dispute with Chinese mobile technology provider Huawei and inked a new, long-term licensing agreement that would net significant rights, and cash flow.

In the video that accompanies this article, I've got several slides that explain all the details -- including analyst views about why this deal is so important for QCOM's crucial role in the coming dawn and rollout of 5G mobile technology.

I also include all the analyst price target moves that helped launch shares 20% in a few days.

Back Royalties of $1.8 Billion

In the company press release, Qualcomm CEO Steve Mollenkopf said, "As 5G continues to roll out, we are realizing the benefits of the investments we have made in building the most extensive licensing program in mobile and are turning the technical challenges of 5G into leadership opportunities and commercial wins. We delivered earnings above the high end of our range, continued to execute in our product and licensing businesses and entered into a new long-term patent license agreement with Huawei, all of which position us well for the balance of 2020 and beyond."

As part of the agreement, QCOM receives $1.8 billion in back royalties and between $200 and $250 million per quarter in ongoing royalties.

The significance of this deal is not lost on the technology investor community since heightened tensions between U.S. and China over technology transfer and IP have brought heavy regulatory scrutiny from Washington, D.C.

According to Wikipedia, "Huawei Technologies Co., Ltd. is a Chinese multinational technology company headquartered in Shenzhen, Guangdong. It designs, develops, and sells telecommunications equipment and consumer electronics. The company was founded in 1987 by Ren Zhengfei, a former Deputy Regimental Chief in the People's Liberation Army."

And as the BBC has reported with this apt summary as they consider their own risks, "The US says Huawei could be used by China for spying, via its 5G equipment. It points to Mr Ren's military background and Huawei's role in communications networks to argue it represents a security risk. But deciding to ban Huawei from 5G in the UK, could risk Chinese retaliation such as a possible cyber attack."

Huawei Surpasses Samsung and Apple as 5G Approaches

While many technology suppliers like Micron and Western Digital have had their business threatened if they could not sell components to Huawei, the Chinese smartphone maker was busy pulling a coup de grace via the coronavirus pandemic.

According to global tech research firm Canalys, Huawei just surpassed Samsung in smartphone shipments in Q2. Huawei shipped more smartphones worldwide than any other vendor and it marks the first time in nine years that a company other than Samsung or Apple AAPL has led the market.

Huawei shipped 55.8M devices, down 5% year on year. But second-placed Samsung shipped 53.7M smartphones, a 30% fall against Q2 2019. Huawei is still subject to US government restrictions, which have stifled its business outside of mainland China. Its overseas shipments fell 27% in Q2.

The key to beating Samsung? As the Chinese economy emerged faster from the pandemic shutdowns, it has grown to dominate its domestic market, boosting its Chinese shipments by 8% in Q2. Huawei now sells over 70% of its smartphones in mainland China.

"This is a remarkable result that few people would have predicted a year ago," said Canalys Senior Analyst Ben Stanton. "If it wasn't for COVID-19, it wouldn't have happened. Huawei has taken full advantage of the Chinese economic recovery to reignite its smartphone business. Samsung has a very small presence in China, with less than 1% market share, and has seen its core markets, such as Brazil, India, the United States and Europe, ravaged by outbreaks and subsequent lockdowns."

Will NVIDIA Pay $40-50 billion for Arm Holdings?

The other big story in semiconductor land I'm following is the rumored M&A talks between NVIDIA NVDA and UK-based chip maker Arm Holdings, which was purchased by SoftBank for $32 billion in 2016.

Here's an excerpt from my TAZR Trader commentary last night, where we hold NVDA shares and may be more than a little concerned about what it spends and where...

Recall last month's rumors about NVIDIA possibly seeking to buy UK-based Arm Holdings from Softbank?

Well Bloomberg published a story Friday with sources confirming there are indeed talks happening. Here are some excerpts from their preliminary story from July 22...

Nvidia Eyes Biggest-Ever Chip Deal in Pursuit of SoftBank’s Arm

Nvidia is in advanced discussions to purchase Arm, the chip designer that SoftBank acquired for $32B four years ago, Bloomberg's Giles Turner, Liana Baker, and Dinesh Nair report, citing people familiar with the matter. The two sides seek to reach an agreement in the next few weeks, the authors say, noting that Nvidia is the only suitor in concrete talks with SoftBank, who had also previously approached Apple to gauge its interest in Arm.

"Arm’s technology underpins chips in everything from Apple Inc. devices to connected appliances. It’s becoming more valuable as the company pushes for its architecture to be used in more smart cars, data centers and networking gear. The company could be worth $44 billion if it pursues an initial public offering next year, a valuation that may rise to $68 billion by 2025, according to New Street Research LLP," write the Bloomberg reporters.

Technology billionaire Masayoshi Son has been selling off some of the trophy assets that he’s collected under his company, SoftBank, and its $100 billion Vision Fund. In recent months SoftBank offloaded part of its stake in Chinese internet giant Alibaba Group Holding Ltd. and a large chunk of its holdings in wireless carrier T-Mobile US Inc.

As you may also know, he took some stunning hits recently with losing investments in WeWork and Uber.

(end of TAZR excerpt)

Be sure to watch the video to learn what NVDA might gain from any M&A and/or strategic partnership with Arm, what the firm specializes in, and why some analysts think the potential deal is already dead in the water due to anti-trust issues.

Clearly investors don't have a problem (right now) with the speculation or potential price tags as NVDA shares are up 10% since we first heard the rumors in the middle of July.

But I have a problem and more than a few questions about the synergies, redundancies and use of cash.

Tune in and let's discuss it on YouTube.

Disclosure: I own NVDA shares for the Zacks TAZR Trader portfolio.

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