Shares of Qualcomm (NASDAQ:QCOM) received a shot in the arm after JPMorgan analyst Rod Hall upgraded the stock to overweight from neutral with a $68 price target, suggesting almost a 15% upside from last weeks stock price. Hall believes that Qualcomm's dispute with Apple regarding royalties will eventually be settled, with the chipmaker getting royalties at incrementally discounted rates from iPhone component suppliers who use its designs.

The JPMorgan analyst is of the opinion that the iPhone maker and Qualcomm will settle their dispute by next year, bringing the chipmaker's royalties to normalized levels by 2019. However, Hall is more bullish about the gains from Qualcomm's acquisition of automotive chip specialist NXP Semiconductors, which makes the stock a good bet at current levels.

Volkswagen car and Snapdragon chip.

Image source: Qualcomm. 

NXP will push Qualcomm's earnings higher

Qualcomm expects to close the $47 billion NXP acquisition by the end of the year. However, JPMorgan believes that the deal could close early by the third quarter of 2017, which could help the company offset the potential revenue losses due to the Apple dispute.

In fact, the firm believes that the benefits of the NXP deal easily outweigh the headline risk Qualcomm shares face from the ongoing dispute, which is not surprising given the potential synergies. Qualcomm expects to realize annualized cost synergies of $500 million within two years of closing the acquisition, boosting its earnings by 50% next year, according to JPMorgan's estimates.

This isn't surprising, as Qualcomm can use NXP's existing relationships to cross-sell its current automotive and Internet of Things products. The combined company can push suppliers to lower raw material costs to reduce the cost of goods sold and boost margins, eventually leading to higher earnings per share.

Qualcomm's automotive business is set to grow

Investors shouldn't miss the fact that NXP is going to bring long-term gains for Qualcomm in addition to the near-term earnings accretion, potentially adding $38 billion to the latter's addressable market by 2020 thanks to its leading position in the automotive semiconductor market. Qualcomm believes that the combined company will have annual revenue of $30 billion, which translates into 30% gains over Qualcomm's trailing-12-month revenue.

It won't be surprising if NXP brings a substantial jump in Qualcomm's revenue, as it commands 14.5% of the automotive chip market, making it the largest player in this space. Demand for automotive chips is going to increase in the long run, thanks to the growing adoption of connected cars.

Based on NXP's estimate each vehicle could contain $374 worth of semiconductors in 2019, pushing the overall market size to $36 billion at the midpoint. This could push the company's automotive revenue to a potential $5.2 billion in 2019 (if it can maintain its market share) as compared to $3.4 billion last year.

Qualcomm's valuation is enticing 

Qualcomm shares have lost almost 10% of their value this year as its dispute with the iPhone maker has negatively impacted investor sentiment. But the possible benefits of the NXP acquisition make it a good bet at current valuation levels.

Qualcomm stock currently trades at just under 20 times trailing-12-month earnings. The forward P/E ratio of 14 shows a potential jump in the company's earnings, which should not seem surprising given the synergies of the NXP acquisition.

More importantly, Qualcomm's five-year earnings growth forecast of 10.5% a year is three-times he growth it has clocked over the past five years. This clearly shows that analysts expect the NXP acquisition to increase Qualcomm's earnings power substantially, which should help the stock deliver more upside once the integration of NXP is complete.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AAPL and Qualcomm. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.