Qualcomm (NASDAQ:QCOM) has multiple, positive catalysts. In addition to its very well-known, high leverage to 5G smartphones, the company can also benefit from the spread of 5G to other devices in particular and the proliferation of the Internet of Things in general. Additionally, Qualcomm stock could be boosted by two other major trends: autonomous driving and artificial intelligence.
But after U.S. District Court Judge Lucy Koh ruled against a key element of the company’s business model last year, investors should avoid the stock, given the havoc that could be wreaked on the company if its appeal of Koh’s decision is fully or partially unsuccessful. (The 9th Circuit appeals court, which is hearing the case, granted a stay of Koh’s decision while the appeal is decided).
Positive Catalysts
Qualcomm’s high leverage to the spread of 5G wireless technology is quite well-documented and very real. In a Feb. 10 note to investors written in the wake of the company’s recent fourth-quarter results, JPMorgan analyst Samik Chatterjee, wrote that he continues to expect the company to benefit from selling its 5G components to smartphone makers. He added that the company’s revenue from 5G is beating expectations so far, and he continues to be upbeat on the company’s 5G opportunity.
InvestorPlace.com contributor David Moadel pointed out that Qualcomm is pleased with its progress in 5G so far and, like JPMorgan, is also extremely upbeat on its overall 5G opportunity. Specifically, during its Q4 earnings conference call, the company noted that it had concluded multiple, major 5G deals and was “extremely well-positioned as 5G accelerates in 2020.”
Meanwhile, Chinese PC maker Lenovo recently launched a 5G PC powered by a Qualcomm chip. If many PCs start to be equipped with its chips, that could be huge for the company’s stock price. Furthermore, it can benefit from the Internet of Things megatrend. Specifically, the company stated that:
“We expect growth in new 51 device categories and industries, resulting from the expanding adoption of certain technologies that are already commonly used in smartphones by industry segments outside traditional cellular industries, such as automotive, computing, IoT and networking.”
As mentioned earlier, Qualcomm can even benefit from autonomous driving and AI. Last month, the company announced that it would develop chips for autonomous cars, although they won’t be available until 2023 and will face a great deal of competition. Finally, the company has invested $100 million, definitely a meaningful sum, in start-ups developing AI, so it could benefit from AI innovations.
The Company’s Business Model Is Threatened
In May, Koh, the U.S. District Court judge, ruling on the Federal Trade Commission’s (FTC) lawsuit against Qualcomm, decided that the company had illegally harmed competition and charged smartphone makers excessive licensing fees. The FTC alleged that QCOM used its ownership of two important wireless patents to force smartphone makers to pay very high fees for its other products. Koh agreed, writing that the chip maker had “strangled competition.”
The New York Times reported that the decision had struck “at the heart of the company’s business.” Indeed, the company’s licensing business, known as QTL, generated $2.14 billion of profits before taxes in fiscal 2019, versus the company’s total FY19 operating profit of $7.7 billion.
So any huge hit to QTL would have a meaningful effect on Qualcomm stock and the company more broadly. For example, if QTL’s before-tax profits fell by 40%, Qualcomm’s operating profits would take a 10% hit, assuming the unit’s proportional contribution to the company’s profits remains constant.
It’s true that, in an extraordinary development, the Department of Justice is siding with Qualcomm against the FTC. Moreover, multiple experts are siding with Qualcomm.
But assuming that the DOJ’s action was ordered by conservative Attorney General William Barr, that may not foreshadow the decision of the 9th Circuit judges who are hearing the case. Historically, the 9th Circuit has been considered quite liberal, although it has become much less so under President Donald Trump.
The Bottom Line on Qualcomm Stock
Qualcomm has multiple, strong, positive catalysts. But given the fact that there is a chance that the company’s business may be about to be badly hurt, now is not the right time to buy shars. Plus, investors may not have to wait long for this overhang to clear; oral arguments on the case are slated to begin on Feb. 13.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
