Qualcomm Inc.QCOM , the largest mobile chipset manufacturer using baseband technology globally, has recently been pressed with a $1 billion lawsuit related to licensing royalty payments by tech giant Apple Inc. AAPL . In the lawsuit filed in the U.S. District Court for the Southern District of California, Apple has accused Qualcomm of overcharging for chips and refusing to pay some $1 billion in promised rebates.
Notably, just a couple of days before filing of Apple's lawsuit, Qualcomm had faced an anti-trust lawsuit from the U.S. Federal Trade Commission (FTC). The regulator filed a lawsuit with the U.S. District Court for the Northern District of California claiming that the company has used anticompetitive measures to maintain a monopoly in baseband chipset market.
The FTC said Qualcomm had established an exclusivity agreement with iPhone and iPAD maker Apple from 2011 to 2016. Through this deal the San Diego-based chipmaker provided billions of dollars in license rebates to Apple subject to the condition that Apple would not use chipset of Qualcomm's rival companies. The company recognized that any competitor that won Apple's business would become stronger, and used exclusivity of the deal to prevent the latter from working with and improving the effectiveness of its competitors.
However, Qualcomm argued that the FTC's complaint is based on "flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry". While the chipset maker observes major flaws in the accusations, it is likely get a full hearing. In the last five trading days, the stock price of Qualcomm has declined 5.34% on Nasdaq.
The FTC alleged that Qualcomm has barred competitors from getting a foothold in the baseband chipset market by using unfair means to secure business, thereby harming consumer choice. Notably, Intel Corp. INTC and Media Tek are closest competitors of Qualcomm in this field. In addition to iOS, Qualcomm chipsets are vastly used for Alphabet Inc.'s GOOGL Google developed Android software and Microsoft Corp. MSFT developed Windows operating system.
Qualcomm generates approximately 29% of its total revenue from the licensing business however, this business accounts for almost 77% of the company's net profit. Moreover, the company has a history of facing allegations related to licensing disputes. The US regulator is latest in the line of accusers alleging Qualcomm of abusing its dominant position and imposing unfair licensing terms.
In 2015, the Chinese regulatory authority, National Development and Reform Commission (NDRC) fined Qualcomm nearly $975 million for abusing China's anti-competitive terms. In Dec 2016, the company was fined nearly $886 million in South Korea for restrictive licensing practices. Moreover, since 2011, Qualcomm has been under investigation for competition violations in the European Union region.
In its filing, Apple has accused Qualcomm of pressurizing the company in providing false statement to South Korea's antitrust regulator, the Korea Fair Trade Commission regarding the above mentioned anti-trust case in that country. Apple and Samsung Electronics are the two major customers of Qualcomm's chipsets for modems that connect phones to wireless networks. The two companies together accounted for over 40% of Qualcomm's $23.5 billion in revenue in fiscal 2016 (ended in Sep 2016). Thus, a royalty lawsuit from Apple may harm Qualcomm in big way.
Price Performance of Qualcomm
In the last one year, the stock price of Qualcomm has gained a substantial 32.16% compared with 5.97% loss witnessed by the Zacks categorized Wireless Equipment industry. Qualcomm, the undisputed leader in the global wireless baseband chipset market is widening its presence in adjacent opportunities, including automotive, networking, and mobile computing strategies which bode well for long-term growth. Qualcomm's Snapdragon processor is best known for its versatility in IoT applications.
However, aggressive competition in the mobile phone chipset market, stringent regulatory norms and anti-competitive charges are some of the major headwinds faced by the company. We believe that these are the reasons behind the company's currently carrying a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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