Qualcomm, Inc. (NASDAQ:QCOM) shareholders got more bad news this week: BlackBerry Ltd (NASDAQ:BBRY) won an $814.9 million arbitration award regarding a licensing agreement. QCOM stock fell 3.5% to $53.39 on the news, and are now down 19.5% for the year so far.
Granted, the BBRY judgment is really a one-off. It has nothing to do about the validity of QCOM’s business model. Basically, the dispute was about the unfairness of paying hefty fees after BBRY saw an implosion of its smartphone business.
But this case should still be a source of worry for those holding QCOM stock. Let’s face it, the licensing model requires tremendous legal resources — and yes, the court system can be dicey.
In fact, there are ominous signs that QCOM’s prowess may be in jeopardy. Here’s a look at the recent legal actions:
- Summer of 2015: The European Commission announced two antitrust investigations.
- Early 2015: The Chinese government fined Qualcomm $975 million for abusive business tactics.
- Late 2016: The South Korean Fair Trade Commission assessed an $850 million fine against QCOM for antitrust violations.
- Early 2016: Apple Inc. (NASDAQ:AAPL) filed a lawsuit against QCOM for $1 billion in damages regarding anticompetitive behavior. This came a week after the Federal Trade Commission launched its own action for excessive fees.
While all these were complicated actions, there is still a general theme — that is, QCOM has allegedly been engaging in unfair practices. In other words, if the company loses some of these battles, it could be extremely difficult to maintain its lucrative licensing fees. Keep in mind that Qualcomm generally charges a percentage of the price tag of a smartphone (which can be as high as 5%), regardless if the technology is even used!
This is why Apple CEO Tim Cook has remarked:
“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.”
Tech history definitely has notable examples of the limits of leveraging market power. Companies like Microsoft Corporation (NASDAQ:MSFT), AT&T Inc. (NYSE:T) and International Business Machines Corp. (NYSE:IBM) have been the target of government enforcement. And the consequences have been significant, such as by having to agree to onerous requirements to allow for more competition.
In the case of QCOM stock, the risks may be even greater. Why? It’s because of the customer concentration. Keep in mind that Apple and Samsung Electronics Co Ltd (OTCMKTS:SSNLF) account for a whopping 40% of annual revenues. As noted by InvestorPlace.com’s Brad Moon: “A material change in the component and royalty payments paid by either of those two companies will have a huge impact on its bottom line.”
Now it’s true that Apple’s litigation could easily take a few years to take its course, but in the meantime, the company could play hardball. According to Susquehanna Financial Group’s Christopher Rolland, Apple may wind up buying all its wireless chips from Intel Corporation (NASDAQ:INTC) by 2018.
So even though QCOM stock is fairly cheap right now — with a forward price-earnings multiple of 11 — and an attractive dividend of 3.8% — investors should still be cautious. There could easily be more downside with the shares.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
