In the seemingly never ending patent pot-shots between technology companies, Nvidia Corporation (NVDA, Financial) is an unusual participant. Last week, it received a favourable ruling in a pre-trial hearing in a suit it had filed against Qualcomm Inc. (QCOM, Financial) and Samsung Electronics (SSNLF, Financial) for infringement of seven patents. This spells more legal trouble for Qualcomm which has just emerged from an expensive settlement with the Chinese government in February for violating the country’s anti-monopoly laws. The company is also under investigation for similar violations in South Korea now. And in more bad news, it emerged last week that Samsung has dropped both Qualcomm’s Snapdragon processor and its modem from at least some variants of its flagship Galaxy S6 model. What does all this mean for the Qualcomm stock?
The Samsung effect
Losing out on just the Snapdragon deal with Samsung is bad enough already since Snapdragon is a combo chipset that is both a processor and a modem and costs more than the sum of other individual components. The removal of its processor for the phone had already been factored in by the company back in in its guidance issued in January. The choice by Samsung to use its own modem instead of Qualcomm’s in some variants of the Galaxy S6 is going to cost the chipmaker somewhere in the region of $200 million in revenue terms.
The problem may go deeper, however. Samsung may decide to use its own processors and modems in more of its models in the future, and that will hurt Qualcomm seriously in the long run. And given the competition Samsung is facing from Chinese smartphone makers, it might just choose to take that route to keep costs down.
The China factor
Qualcomm has had to shell out $975 million in fines to the Chinese government for monopolistic practices, but that ruling might lead to better reporting of smartphone sales by Chinese manufacturers that use Qualcomm chips. If that happens, it might benefit Qualcomm’s Chinese business eventually.
Chinese smartphone makers such as Xiaomi are already among the largest in the world and are continuing to expand rapidly. There are many markets they haven’t entered yet and their expansion will give a further fillip to Qualcomm. Putting the investigation behind them, President Derek Aberle says the company is now in a position to expand cooperation with Chinese companies to help build their export business.
Patents galore
Qualcomm is mostly known for the chips it provides to smartphone makers like Samsung and Apple Inc. (AAPL, Financial) and a host of other smartphone makers around the world. It also collects royalty from many other processor and modem manufacturers for using its patents surrounding many aspects of mobile technology, be it 2G, 3G or even 4GLTE. With close to 21,500 patents in many countries around the world, this portfolio alone makes Qualcomm a company to reckon with.
Conclusion
While the company has been hit by a spate of bad news in the last couple of months, but that is no reason to stay away from this stock. The shares have already lost value on the back of the negative news to affect the company, and the going looks mostly good from hereon for this company with solid fundamentals. The reduced price of the stock makes for a very attractive entry point, and we recommend a BUY in the stock.
