Qualcomm Inc. (QCOM) can’t catch a break. In fact, there are signs that the company is on the verge of an epic implosion, as has been common in the brutally competitive mobile space. After all, just look at what happened to former highfliers like BlackBerry (BBRY) and Nokia (NOK).
As for Qualcomm stock, the performance for shareholders has been downright horrific. So far in 2015, QCOM stock has lost 35%.
So what’s going on? And is there much hope here for those brave investors who are considering Qualcomm stock?
In short, the company is facing enormous pressures on multiple fronts, and isn’t worth entering into a risky position.
Qualcomm Stock Faces No Shortage of Problems
Qualcomm faces growing issues with antitrust litigation. The latest comes from South Korea — and the news knocked down Qualcomm stock about 9% in Wednesday trading. The South Korean government claims to have evidence of violations, and intends to impose hefty fines and restrictions.
The problem is that Korea is really going after the heart of QCOM — that is, the company’s focus on licensing of its core technology, which is called CDMA, or code division multiple access.
In truth, any potential fine will likely be incidental. Rather, the big threat to Qualcomm stock would come if the Korean government decided to gut QCOM’s business model, which could certainly be a big threat to revenues.
Korea isn’t the only government that is investigating the QCOM business model. There are also ongoing in efforts from the U.S. Federal Trade Commission and the European Union (though both investigations are still in the early stages).
Back in February, the Chinese government slapped Qualcomm with a $975 million fine and permitted customers to change royalty rates. Now, QCOM’s customers in China are playing hardball on negotiations, which is why the company had a tough recent quarter and weak outlook on earnings.
Now it’s QCOM stock might seem attractive at current levels, with a forward price-to-earnings ratio of 10. By comparison, Intel (INTC) is trading at 14 times future earnings and Avago Technologies (AVGO) is currently trading at 13x. Besides, QCOM stock is yielding a decent 4%.
Also keep in mind that the company has been under pressure from activist investor Jana Partners. In response, QCOM has taken actions to reduce the workforce by 15% and find other cost savings. There is even buzz of some type of spinoff.
Despite all this, the nagging issue remains that Qualcomm stock is likely to be weighed down for some time because of the overhang of the litigation. In fact, antitrust suits can is costly and distracting. And if history is any indication — as seen with cases with Microsoft (MSFT) and IBM (IBM) — the long-term impact on a company’s stock price can definitely be especially problematic.
But QCOM could be in a worse situation than those companies, as the current governmental actions are going against the company’s core licensing business, which accounts for about 60% of operating income.
So even though QCOM seems like a bargain right now, there’s a good chance that it could really be just a classic value trap.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
