Qualcomm (QCOM) earnings were so bad, the only thing keeping QCOM stock from total collapse is the involvement of an activist investor that’s calling for a breakup of the troubled chipmaker.
To recap: hedge-fund Jana Partners — one of the company’s largest shareholders — wants QCOM to spin off the chipmaking business from the patent-licensing business.
After quarterly results, that idea sounds better than ever. Indeed, QCOM itself said it’s considering a break-up even as it announced a huge restructuring operation.
The major issue for QCOM is that although it’s a huge player in the market of manufacturing chips for mobile devices like smartphones and tablets, it’s kind of a crummy business.
Making chips that connect mobile devices to cellular networks is a relatively costly and low-margin affair. On the other hand, QCOM’s other main source of revenue — licensing its patents — is very high-margin and much more profitable.
The imbalance between these businesses is captured perfectly by the fact that although the chip operations generate almost all of QCOM’s revenue, the licensing business contributes almost all of its profits.
And as the latest Qualcomm earnings report revealed, the chipmaking business is worse than ever.
QCOM Is Reeling
When it comes to making chips for high-end smartphones, QCOM finds itself squeezed by Samsung (SSNLF) on one side and Apple (AAPL) on the other. Qualcomm actually lost the business of supplying chips for Samsung’s new flagship phone, the Galaxy 6.
The bottom line is that the chipmaking business has become a liability, forcing QCOM to slash costs, undertake a strategic review, and gut its own outlook. As an analyst at Bernstein Research said in a note to clients:
“Last night Qualcomm offered guidance for Q4 that practically knocked us out of our chair as the chipset business, which has been showing significant cracks in recent quarters, entered the realm of total collapse.”
In a move to help placate investors, QCOM is cutting 15% of its workforce as part of an effort to cut $1.4 billion in annual costs. Bulls think this will unlock value in the stock, but Jana Partner’s break-up plan is a better idea.
After all, breakups are in fashion these days — just look at General Electric (GE) — and mergers and acquisitions are booming. The market tends to reward these things, and that’s why Qualcomm stock avoided an even bigger beating on the earnings news.
Of course, companies are loathe to make themselves smaller. It’s unclear if QCOM’s review of its corporate structure is a serious look at breaking up, or just away to buy time with Jana.
Either way, it’s a process that’s going to drag on. And although that helps put a floor on shares, the attendant uncertainty — and profound fundamental problems — put a low ceiling on Qualcomm stock, too.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
