Qualcomm, Inc. (NASDAQ:QCOM) has a government-approved monopoly on radio chips, has patents going back over a quarter century and is the biggest producer of them. Apple Inc. (NASDAQ:AAPL), meanwhile, holds a monopsony, for it is a buyer large enough to control costs, forcing suppliers to dance to its tune.
When monopoly meets monopsony, trouble often follows, and so it has been in this case. Apple and Qualcomm are suing one another, ostensibly over patents and pricing but really over the cost of Qualcomm’s monopoly power.
Qualcomm asserts that the price of that power has not changed, but when spread over billions of devices Apple sees it as excessive. Governments in China and South Korea have made the same argument. Qualcomm settled with China and is fighting with Korea. Apple has brought the U.S. government in on its side. Both sides have lawyered up for a siege.
Legal war is not healthy for corporations and other living things.
The Cost of Conflict
Since the start of 2017 Qualcomm shares are down 10%. The drop came on Apple’s lawsuit in January, and the stock has not really recovered.
The suit shaved $10 billion off Qualcomm’s market cap, and resulted in it showing just $5.015 billion in sales for the quarter ending in March, against $5.551 billion a year earlier, as Apple cut off payments. Net income was also down, to $749 million from $1.1.64 billion a year earlier. The stock has recovered a bit because it’s assumed the feud will end.
The question is when peace might come, and at what cost.
Analyst Rob Enderle thinks Qualcomm has the upper hand but that Apple could still “go nuclear,” turning its marketing department on Qualcomm’s brand. He notes that both companies have recently hired executives from Intel Corporation (NASDAQ:INTC), known for playing hardball, and this may be behind the conflict’s escalation.
The issue is that Qualcomm’s royalty rates for its patents are based on the cost of finished goods, and since iPhones are pricey it pays more. Apple says it can’t play QCOM against other chip suppliers because of Qualcomm’s “no license, no chips” policy, which guarantees it will pay more that way. It’s an argument that has been repeated by the Federal Trade Commission, which filed its complaint against Qualcomm right before Apple filed suit.
The suit doesn’t just pit two companies against one another, in other words, but companies and governments. Don’t worry about QCOM stock, though. It has played this game before, with China, and won.
The Peace Dividend
As peace approaches, Qualcomm looks like a better buy than ever, thanks to its pending $47 billion acquisition of NXP Semiconductors NV (NASDAQ:NXPI), although big NXP shareholders know that and want the deal renegotiated, at a higher price.
As our James Brumley wrote recently, recommending the stock, NXP is Qualcomm’s way into the self-driving car market, and the Internet of Things, in which chips go into all sorts of non-tech products.
QCOM stock is next due to report earnings on July 19, and the whispers are that profits will come in at 67 cents per share, well below where they were a year ago at $1.16. Analysts are playing it cagey, about half calling the stock a buy right now and half a hold.
The fact is that, once it obtains peace, the dividends for Qualcomm will be substantial, although most will be in a competitive market where it will face Intel, which recently bought NXP competitor Mobileye NV (NYSE:MBLY).
My own view is that income investors should see the feud as an opportunity. Qualcomm recently increased its dividend to 57 cents per share, meaning the yield at its current price if almost 4%. Peace will mean a higher price for the stock and, correspondingly, a lower yield, so if you’re looking for dividends, now is the time to buy.
But if you want capital appreciation, you should be willing to wait for it, and buy when peace is at hand.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in INTC and AAPL.