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Bear Of The Day: Qualcomm (QCOM)

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Qualcomm (QCOM - Free Report) had a disappointing June quarter earnings with management significantly lowering guidance. Management sees slowing phone sales and trade headwinds as the catalysts for a disappointing year. Sell-side analysts have been dropping EPS estimates throwing QCOM into a Zacks Rank #5 (Strong Sell).

Qualcomm is facing quite a few long-term headwinds, with its licensing business being under FTC scrutiny and disruptions with some of the company’s largest customers.

Qualcomm is on the verge of losing two of its largest customers. Huawei has been blacklisted in the US banning companies to do business with them. Being a major revenue driver of Qualcomm, this has already started to negatively impact its financials and if an agreement can not be made this could have long-run detrimental effects. The increasing tension between the US and China isn’t providing any help to Qualcomm’s outlook.

Apple is another one of QCOM’s largest customers and they are in late states talks with Intel (INTC - Free Report) to buy out their 5G modem business. This would cut Qualcomm out of America’s largest smartphone manufacture’s long-term strategy.

Licensing Issues

Judge Lucy Koh made a stock killing verdict on May 22nd, claiming that Qualcomm is participating in unfair practices involving its patent licensing. If the ruling stands, the firm will be forced to renegotiate licensing terms that would be considerably less profitable.

This is following a sweeping win by Qualcomm over a dispute with Apple (AAPL - Free Report) regarding chip royalties. Apple settled the suit by agreeing to pay Qualcomm between $5-$6 billion in additional licensing fees in order to gain access to the firms 5G smartphone chips. Apple is now in talks with Intel (INTC - Free Report) to buy their 5G chip business and cut Qualcomm entirely out of the equation.

Qualcomm’s patents are its most substantial income driving assets. Licensing makes up the majority of the company’s operating profits. Disrupting this business segment would significantly impact the firm’s profitability.

Qualcomm has agreements on the verge of expiration and will be forced to renegotiate them under the FTC’s terms if they are unable to get the ruling reversed.

Take Away

This company doesn’t have any systemic issues that I am afraid of other than its reliance on licensing profits. Qualcomm has experienced very unfortunate circumstances in the political space. It will continue to punish the firm if they are unable to work around the issues. Declining smartphone sales isn’t doing the company any favors either.

 

The current issues that the firm is facing with the loss of customers and limited licensing profitability, could have a significant downside to QCOM if issues are not resolved.

 

 

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