Qualcomm (QCOM, Financial) rewarded shareholders with great returns, as it performed amazingly well in 2016. The stock was up over 30% in 2016. However, the stock has taken a hard hit heading into this year, as it down approximately 14% year to date.
There are two big reasons for the hard hit taken by Qualcomm. First, the U.S. Federal Trade Commission (FTC) lodged an antitrust complaint against the company. The FTC suspected that the company is using its leading position as a supplier of baseband processors to extract heavy supply and licensing terms from smartphone makers.
Second, just a few days later, Apple sued Qualcomm regarding patent loyalty issues. Apple sued Qualcomm for $1 billion and blaming it of falsely charging royalties for technology “it has nothing to do with.”
Qualcomm reported its first quarter result on Jan. 26. In first quarter 2017, the company detailed earnings per share of $1.19, barely surpassing the analyst estimates by 1 cent. Its revenue came in at $6 billion, missing the consensus by $120 million. Still, that figure represents a surge of 4% year over year.
Moreover, Qualcomm’s QTL (Qualcomm Technology Licensing) endures to grow at a strong rate. In the first quarter, the revenue generated from QTL business came in at $1.8 billion, up nearly 13% year over year. It was primarily due to the escalating sales of smartphone and licensing and agreement progress in China, together with robust growth of worldwide sales by Chinese licensees.
The above figure clearly suggests that QTL business is responsible for generating a substantial portion of the company’s overall revenue. Hence, if the company loses the case filed by Apple and several other regulators, it could eventually end up changing its entire licensing model which will have an adverse impact on its profit margins.
On the other hand, the company’s most significant Qualcomm CDMA Technologies (QCT) business also endures to face several problems mainly due to the fierce competition from cheaper rivals such as Media Tek as well as ARM chips from large OEMs such as Samsung.
Keeping this in mind, Qualcomm is putting in a lot of efforts to diversify its revenue stream. The company has started offering specialized Snapdragon chips for drones, wearables, connected cars, etc. in point of fact, autonomous cars market account for of the hottest growth area, and the company agreed to purchase NXP Semiconductors (NXPI, Financial) for $47 billion, as NXP holds a leading position in the automotive chip manufacturing market.
To compensate the slowdown in its QCT and QTL business, it is very essential for Qualcomm to acquire NXP Semiconductors, as it will enable it to establish prominent positions thru the automotive, smartphone, as well as several other growing markets.
Summing Up
Qualcomm showed decent performance in 2016, but the stock is facing some serious problems this year. If Qualcomm loses the case, patent licensing lawsuits could have an adverse impact on the company.
It could also force the regulators to block the NXP Semiconductors acquisition. However, if this happens, Qualcomm will be in a great problem, as its core businesses carries on facing slowing growth concerns. On the bright side, it is also likely that the recent weakness in the company could end up being a pleasant buying opportunity.
As a result, shareholders should wait for some time and let the fiery situation cool down.
Disclosure: No position in the stocks mentioned in this article.
