It’s a bittersweet victory, to be sure. Just when Qualcomm, Inc. (NASDAQ:QCOM) starts to unveil a game-changing technology, a legal hurricane starts to make landfall. If any current or would-be owners of QCOM stock are torn as to what the future likely holds, there’s good reason.
And yet, as much jeopardy as the company’s bottom line may be in at this time, the fact that Qualcomm stock is still down more than 25% over the past three years suggests the market saw a litigation headwind coming sooner or later. The worst-case scenario may already be priced into QCOM stock, which means the recent weakness makes for a compelling entry point.
The Bad
The legal wrangling is mostly with Apple Inc. (NASDAQ:AAPL), superficially. But, should Apple be successful with its effort, it opens the door to other litigation, not to mention emboldens a similar case being brought against Qualcomm by the Federal Trade Commission.
The short version of the story: Apple (and the FTC and the Korea Fair Trade Commission, for that matter) are all arguing the same thing — Qualcomm’s business model of licensing its technologies to phonemakers is not only exorbitant, but unlawfully stifles competition. That’s a legal no-no in most any country. The Korea Fair Trade Commission is seeking $873 million for essentially the same.
For the record, QCOM has lost this argument before. In 2015, the company forked over $975 million to China for breaking that country’s antitrust laws. Indeed, Qualcomm was allegedly charging all-encompassing licensing fees to phonemakers that may or may not have needed access to all of the technology in that IP package… another dubious practice.
Years of sharp dealing have finally caught up with Qualcomm.
The Good
The irony is, while the company was over-milking its aging patent portfolio, QCOM was also developing some new — and highly marketable — intellectual property.
The idea of the Internet of Things (IoT) is an exciting one, but the reality is, the technology and bandwidth needed to meet the need just isn’t ready, yet. Or, it wasn’t anyway. This week, Qualcomm unveiled its 802.11ax technology, which can carry four times the amount of data current Wi-Fi technology carries, but without using any more bandwidth.
Qualcomm Technologies VP Rahul Patel explained:
It is taking Wi-Fi to a new level from a user-experience point of view. What it is trying to do is prepare the Wi-Fi network, which in many cases is experiencing a lot of congestion, largely because the network is becoming dense and is not able to deal with the amount of traffic.
At the same time, the company has created a whole new kind of RF “front end,” or the radio connection between a mobile phone’s modem and the transceiver. Not only is it a superior solution to current alternatives, it’s a simpler solution that works with a variety of connection protocols, such as LTE and MIMO, by the utilization of modem intelligence.
They’re not the kind of advances the average consumer cares about, or even understands. With 5G connectivity about to become the norm, however, these little advances are actually big advances that phonemakers will desperately need.
Bottom Line for QCOM Stock
In simplest terms, the future of QCOM stock lies somewhere between the two ends of this good/bad continuum. One way or another, sooner or later, Qualcomm’s business model of leveraging an aging patent portfolio — and doing so in a questionable manner — is going to falter. If the company wants to continue being an IP player, it’s going to need some new IP.
The question is, will 802.11ax and new RF front-end platforms be enough? It matters, simply because the company’s licensing and royalty revenue is roughly twice its revenue from outright chip sales.
The answer to this question is a qualified yes; the qualification is the speed with which lawsuits will result in a decision, and the time that will be needed for IoT and 5G to reach critical mass. Odds are good the former will hurt before the latter helps, meaning Qualcomm could be headed for a dry spell, earnings-wise.
Still, for the true long-termer who can stomach the “in the meantime” volatility, the market may start to appreciate the potential of the distant future now…after a few years of strong bearish pressure.
QCOM stock may not be appropriate for grandma’s retirement portfolio, but there’s little doubt the company’s new technologies will be crucial to the next generation of connectivity.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
