Is Qualcomm, Inc. (QCOM) Stock Stuck In a Bear Trap?

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Qualcomm, Inc. (NASDAQ:QCOM) is really a victim of its own amazing success. Since the mid-1980s, the company has been able to develop cutting-edge mobile technologies that have defined the industry. The result is that the profits have been standout. Yet this has caught the ire of customers and even governments. The claim: QCOM is really a monopolist that is willing to leverage its unfair power.

Is Qualcomm, Inc. (QCOM) Stock Stuck In a Bear Trap?

This has happened to other tech titans through history, of course.

Just some of the examples include Microsoft Corporation (NASDAQ:MSFT), AT&T Inc. (NYSE:T) and International Business Machines Corp. (NYSE:IBM). The problem is that — even when they resolved their legal disputes and antitrust actions — the companies suffered a prolonged period of stagnation and sub-par investor returns.

Unfortunately, I think the same could be the case with Qualcomm stock. Already the returns have been lackluster. For the last five years, QCOM stock has posted a miserable 11% loss.

QCOM Stock’s Woes

Then again, the company must deal with a host of massive legal actions. While one was settled, which included a $975 million payment to the Chinese antitrust authorities, there are currently active suits in the U.S., Europe and Korea, which recently filed a claim for $873 million. Then of course, there is the $1 billion suit from Apple Inc. (NASDAQ:AAPL).

And yes, the core legal claim is that the practices of QCOM are inherently anti-competitive and unfair. After all, when the company charges a royalty, it is not a fixed amount per unit, but instead a percentage of the price of the device.

According to AAPL CEO Tim Cook:

“They were insisting on charging royalties for technologies that they had nothing to do with. And so we were in a situation where the more we innovated with unique features like touch ID or advanced displays or cameras, just to name a few, the more money Qualcomm would collect for no reason, and the more expensive it would be for us to innovate. So, it’s somewhat like buying a sofa and you charge somebody a different price depending upon the price of the house that it goes into, just from our point of view, this doesn’t make sense and we don’t believe it will pass muster in the courts.”

Interestingly enough, the potential monetary damages are almost trivial. QCOM has a cash hoard of $10.8 billion and a market cap of $86 billion.

The real issue then? Well, for Qualcomm stock, it’s the threat to the business model. According to the most recent 10-K, the licensing business generated a juicy $6.5 billion in pre-tax earnings last year, compared to $2.2 billion for the rest of the other operations.

In other words, if the licensing arrangements are deemed to be unfair and anti-competitive, then the ramifications could be far-reaching. It would strike a dagger straight into the cash machine. So given this, is it any wonder that QCOM stock has been such a terrible investment?

Of course not.

Now it’s true that there are still some bullish factors at work with Qualcomm stock. The company has made some key strategic investments with its chip technologies, which should open up profitable opportunities with desktops and data centers. To make this happen, QCOM has a major partnership with MSFT to use Snapdragon 835 processors for the Windows 10 platform.

There are also some other compelling growth opportunities, such as with market for autos and the Internet of Things. In fact, the company has made a huge wager on this opportunity with the proposed $47 billion acquisition of NXP Semiconductors NV (NASDAQ:NXPI), which is the world’s fifth-largest non-memory semiconductor supplier and it has a large chunk of key markets for in-vehicle systems, secure identification, near field communication technology and digital networking.

Oh, and Qualcomm stock is trading a very reasonable valuation. Note that the forward price-to-earnings ratio is only 12X.

Bottom Line on Qualcomm Stock

But this may not matter much. A large-cap tech company can languish for quite a while, especially when there remains uncertainty. And again, with QCOM stock, the problem is that its business model is under relentless attack. In the meantime, the growth rate for smartphones has decelerated over years as markets have become saturated.

So in light of all this, Qualcomm stock really looks more like a bear trap, not an interesting value opportunity.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A BundleFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/qualcomm-inc-qcom-stock-bear-trap/.

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