Qualcomm is the world's largest mobile chipmaker. The company has two lines of business: 1. Qualcomm CDMA Technologies that generates bulk of its revenues (SnapDragon processor) and 2. Qualcomm Technology Licensing which collects royalty payments by licensing it's patent. The second business generates more than 70% of its profits. It is this business that has helped QCOM generate huge Cash reserves. QCOm right now is in process of acquiring Internet of Things company called NXP Semiconductors.
Qualcomm Technology Licensing Business in serious Legal Trouble
Qualcomm: Intel of Mobile world, now struggling with bad luck. In 2016: Chinese companies threatened over IP fees now US Govt after them pic.twitter.com/j74BBCldbg
— Deepak Singh (@smarket) January 24, 2017
Qualcomm's licensing arrangements are anticompetitive. This is big allegation coming from the U.S. Federal Trade Commission (FTC).
It's not new - the trouble started first with Chinese OEMs and then regulators in 2014-2015. Many Chinese original equipment manufacturers (OEMs) simply stopped paying Qualcomm the licensing payments, to protest what some viewed as excessive fees. The stock tanked from $80 to $45. Qualcomm settled the deal with Chinese Govt and South Korean Govt. Now US FTC and Apple pursuing damages. In April this year, Apple suspended all licensing payments to Qualcomm
How do fundamentals change?
Qualcomm, leader in wireless chips - got hit by US FTC and then Apple lawsuit on its IP pricing model pic.twitter.com/WaIwYI2GoK
— Deepak Singh (@smarket) January 26, 2017
NXP Deal in Trouble
Qualcomm is trying to buy an Internet of Things company called NXP Semiconductors. Deal is in trouble?
EU regulators are stalling its acquisition of NXP Semiconductors. At least 70% to 80% of those shareholders must tender their shares for the deal to be approved. Unfortunately, activist investor Elliot Management, which owns a 6% stake in NXP, has repeatedly stated that Qualcomm's $110 per share offer undervalues the company
Summary: Fundamentals in Trouble
Qualcomm Valuation looks attractive: The stock is trading at 15 multiple with dividend yield at 4.3% and huge cash reserves to support it. But with company involved in so many legal battles and with no clarity on acquisition - it's very difficult to make an investment case. The stock is simply Avoid as of Now
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers