QUALCOMM’s Quandary


In discussions with some of my investing buddies I brought up Qualcomm as a potential target. This company is EVERYWHERE when it comes to chip technology, those little buggers that handle all of your smartphone’s computing, for instance. The company has had an impressive run of beating analyst estimates and providing ever-rosier forward guidance during earnings calls. I quickly added the company to most of my watch lists and began to research further.

This is when things fell apart.

A couple of days later, Apple announced lawsuits against Qualcomm in the U.S. in China, accusing the company of retaliating for cooperating in an antitrust lawsuit; more on that later. Apple also attacked Qualcomm’s patent royalty fees. Qualcomm is a major part of Apple’s supply chain, providing chips for over half of their shipped iPhone handsets. Qualcomm’s response was something like this, “we prefer to handle price negotiations in the board room, rather than the courtroom. Unfortunately, Apple jumped the shark.” Such a response makes it seem like business as usual, nothing to worry about right? Later I read further and find that the Republic of Korea recently sued Qualcomm as well for antitrust violations, as I mentioned. That suit alleged that Qualcomm charges exorbitant fees, even managing to charge companies for handsets that DO NOT carry their chips. (SN: How this happens, I don’t know, but somehow, someway companies have signed these contracts allowing this practice.) The end result of the Korean antitrust suit was a fine of $890MM. As a one-off charge, this is not of concern to investors. However, if this is a sign that the international community will not allow Qualcomm to continue to collect these royalties at these levels, this affects their cash flows forever.

Given all of the regulatory risk that has been revealed over the two weeks, Qualcomm’s share price has dropped dramatically (~15%). Does this present an opportunity for a business that is performing very well, or is this is a tale of attempted regulatory arbitrage by the company that is blowing up in their face? If you are in the former camp, this pullback is an opportunity for you to buy in right now. If you are in the latter camp, run, don’t walk, from this one (or short the stock if you’re feeling frisky). I leave it to you all to decide.
**I do not have holdings in the stocks mentioned in this post**

-Joe

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