New research from Kerrisdale Capital suggests that Qualcomm Inc (QCOM.O) profits could be at risk as the company faces legal battles in the United States.
Activist investor Sahm Adrangi says that he has taken a short position against Qualcomm, arguing that the chip supplier’s stock price could shrink by half.
Qualcomm’s stock traded at $54.16 on January 22, 2019, and the research published by Kerrisdale indicates that there is a high risk that the price will decrease by 50 percent within two years. Qualcomm has a market capitalization of $66 billion and its stock is owned by mutual fund companies such as Vanguard and Fidelity.
Earlier this week, Reuters reported that the Federal Trade Commission (FTC) had already filed in the U.S. District Court for the Northern District of California, alleging that Qualcomm’s patent licensing and chip sale practices were anticompetitive. If Qualcomm loses to the U.S. Federal Trade Commission, it could be forced to license core patents to competitors and renegotiate existing licenses on new terms.
Adrangi speculated that continued litigation against Qualcomm, especially from the FTC, could create uncertainty about Qualcomm’s future prospects, resulting in a rapid drop in stock prices. A judgment against the company in the FTC case could force an overhaul of its business model.
Adrangi has said in the past that Qualcomm had been able to keep its business model going, but this time the threat of litigation was far more severe.
The licensing business, despite contributing far less revenue than the chip business, has historically supplied roughly two thirds of Qualcomm’s profits, thanks to its extremely high profit margins, the report said. In the past few years, regulators, including the FTC, have concluded that Qualcomm’s ability to extract massive licensing fees from device makers like Apple and Samsung stems not from the quality of its patents but from unlawful monopolistic tactics.
In particular, authorities in China, Taiwan, Japan, South Korea, Europe, and the United States have found fault with what they see as Qualcomm’s exploitation of its dominance in the market for premium modem chips (the components of smartphones that enable them to connect to cellular networks) to force device-makers to pay high patent royalties, even on devices that don’t contain Qualcomm chips. These core Qualcomm business practices, regulators contend, violate binding pledges the company has made to license critical patents on “fair, reasonable, and non-discriminatory” terms, including to rivals like Intel.
The Kerrisdale research paper said that a forthcoming judgment against Qualcomm is even more likely due to the fact that Judge Lucy Koh, who is presiding over the case, has already ruled against the company before on several matters and would likely be inclined to rule for the FTC.
PR Newswire also reported the story this week and said that Kerrisdale has a short position in shares of Qualcomm and stands to benefit if its share price falls.
Kerrisdale Capital is a New York- based hedge fund managing roughly $150 million in assets. The fund reported a 37 percent gain in 2018.
Kerrisdale’s full report can be found at https://kerr.co/qcom.