The tech rally has left Qualcomm, Inc. (NASDAQ:QCOM) shareholders in the dust. For the year so far, mega tech operators like Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB) have posted 30%+ gains. But, as for QCOM stock, it hasn’t even been able to muster positive returns.
This is certainly unnerving, since QCOM is a critical part of the mobile mega-trend. Consider that the company’s technologies are global standards.
But of course, all this is overshadowed by the cloud of litigation. And, perhaps the most threatening legal action — for QCOM stock — comes from Apple Inc. (NASDAQ:AAPL). In January, the company filed a complaint for $1 billion.
The move was not necessarily shocking. For some time, AAPL has been complaining about the royalty structure from QCOM, which can amount to as much as 5% of the price of an iPhone. So, given AAPL’s massive scale, there could be a nice lift in operating profit if it could reduce those terms.
Suing for $1 billion seems kind of palty, but if AAPL prevails, the legal consequences are likely to be severe. The company is taking direct aim at the core business model of Qualcomm, which is to license its technologies. And yes, the company has more than enough cash to fight this war.
Expanded Litigation Further Threatens QCOM Stock
But, this week Qualcomm got even more bad news: AAPL amended its lawsuit, adding even more legal problems. It now asserts that some of QCOM’s patents are invalid and that the business model violates the law. Interestingly enough, AAPL is relying on a recent Supreme Court case that limits a company’s ability to control a patent after a product is sold. The main reason is to avoid the potential for double-dipping on royalties.
AAPL believes this ruling applies to QCOM, since it also sells chips. The company also argues that its iPhones are much more than just cellular devices, so in other words, it’s reasonable that QCOM’s patents are not as relevant.
No doubt, the law can be dicey and AAPL’s arguments are far from foolproof. QCOM has already put forth solid arguments, such as that its technologies are cutting-edge and based on tremendous R&D efforts.
But, all this may not matter much. Keep in mind that AAPL has been ordering its suppliers to stop payment of royalties to QCOM. Because of this, the company recently lowered its earnings outlook.
Bottom Line on Qualcomm Stock
For QCOM stock, there is more than just the AAPL litigation. The company must also fight similar actions pursed by governments such as South Korea, the EU and the U.S. For the most part, just one adverse judgment could mean a hit to QCOM stock. And, even if the company somehow prevails on all the cases, there will still be heavy costs and managerial distraction.
This happened with other companies — e.g., Microsoft Corporation (NASDAQ:MSFT), AT&T Inc. (NYSE:T) and International Business Machines Corp. (NYSE:IBM) — that had to battle tough governmental actions.
This is not to imply that there will be an implosion, though. There are definitely positives for QCOM stock. The company is in the process of acquiring NXP Semiconductors NV (NASDAQ:NXPI), which will provide a valuable footprint in the fast-growing market for auto technologies. QCOM stock also sports an attractive dividend of 4% and the forward price-to-earnings multiple is at about 14x.
But then again, stock prices can stagnate for long periods of time. This often happens when there are threats of massive litigation, which goes to the heart of a company’s business model.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
