At first glance, Qualcomm, Inc. (NASDAQ:QCOM) is a terrible underperformer. Down nearly 20% year-to-date, QCOM stock is making the benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) look compelling. Even worse, Qualcomm is lagging severely behind rivals like Intel Corporation (NASDAQ:INTC), which isn’t doing too hot, either. Everything seemingly screams “run!” I don’t blame anybody who actually did, or is contemplating it.
According to InvestorPlace contributor Vince Martin, Qualcomm faces an existential threat. While volatility in QCOM stock stole headlines this January thanks to the Apple Inc. (NASDAQ:AAPL) lawsuit, troubles began much earlier. Martin notes that company shares peaked during the first half of 2014. Just prior to the Apple fiasco, QCOM was already in a world of hurt. The lawsuit simply pushed it over the edge.
Furthermore, Martin argues that present accusations of corporate shenanigans didn’t, in his words, “magically appear.” He writes:
Qualcomm already had paid antitrust fines in China and Korea. Just three days before the Apple news, the U.S. FTC charged the company with monopolization in baseband processor devices. The argument from Apple that Qualcomm is unfairly charging royalties isn’t new, and it isn’t unique.
Individually, all these controversies hit the newsstands. More critically, however, the Qualcomm business structure is at risk. Licensing is responsible for approximately 80% of total profit. If Apple gets its way in its lawsuit, a domino effect could occur. In such circumstances, we could kiss QCOM stock goodbye.
Ignore Qualcomm’s Upside Potential at Your Own Risk!
Given the pensive sentiment among covering analysts, and the general mood surrounding Qualcomm, most folks are at least questionable towards QCOM stock. Certainly, you’re not going to find too many bullish arguments for the beleaguered company.
Yet they do exist, if you sift through the negativity.
First off, we have to remind ourselves that in terms of the legal battles, nothing is set in stone. Inevitably, legal experts will square off to debate the merits of both sides. But no matter how surefire Apple and other plaintiffs appear, we won’t know until we know.
One thing that can be said is that should the legal drama result in an unexpected outcome, QCOM stock is primed to explode higher. Admittedly an unconventional example, this situation is akin to the upcoming Mayweather vs McGregor bout. Boxing experts to couch potatoes mostly agree that MMA cage-fighter McGregor stands no chance against the defensive genius Mayweather.
Still, every contestant has a puncher’s chance. Should McGregor pull off the impossible, taking the speculative bet would result in a huge profit. That’s the unlikely but very real risk that QCOM stock bears must acknowledge.
Should a legal decision favor Qualcomm, the tech firm has other potential tailwinds to leverage. QCOM’s NXP Semiconductors NV (NASDAQ:NXPI) acquisition is presently pending EU anti-trust regulatory approval. If the deal closes, which InvestorPlace’s Ryan Fuhrmann believes that it will, it opens up new growth opportunities. Most significantly, a successful approval will materially reduce “Qualcomm’s dependence on mobile phone licenses and semiconductor sales.”
Our own Chris Lau proposes a similar argument. Lau states that China’s smartphone market is booming. In particular, Chinese consumers demand Qualcomm’s microchips. Furthermore, the company is working heavily on the Asian giant’s 5G wireless technology integration. Again, this could be a game-changer for QCOM stock.
QCOM Stock Is Holding Strong
With strong arguments on both sides of the fence, I want to look at the technical charts. Just like the fundamentals, the market is hard to decipher. Even looking at QCOM stock from strictly a trading perspective, it’s extremely tough to make a call.
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However, we must consider that Qualcomm has endured plenty of bad news. Mainstream pundits collectively soured the mood with negative prognostications. Yet with all these challenges that are supportive for the bearish trade, QCOM has held strong. If I had to gamble, I would say that the company has baked in most of the bad news.
Although no side owns a distinctly clear path to victory, I argue that the risk-reward balance at this point slightly favors the bulls.
Right now, QCOM stock is heavily levered towards its licensing business. But management is not given enough credit for mitigating that fundamental risk. And if the legal battle swings towards Qualcomm, it’s going to be a bloody day — for the bears.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
