Patience is not simply the ability to wait – it’s how we behave while we are waiting. – Joyce Meyer.
Qualcomm (QCOM) has 2 main components of its business: one where it licenses its IP (Intellectual Property) to cellphone companies and one where it sells chipsets to those companies. Its primary profit maker is its IP business. It owns multiple patents for important technology which enables cellphone transmissions e.g. technology that controls how modems convert our voices to radio signals and transmit them to cellphone towers. It charges a licensing fee to all the cellphone manufacturers for that technology. That licensing fee is typically a percentage of the cellphone selling price.
Couple years ago, Apple balked at paying the high licensing fees to Qualcomm. Their argument was that licensing fees should be a certain fixed amount rather than a percentage of cellphone selling price. The thinking was that with Apple phones selling at premium prices; it did not make sense for Apple to pay Qualcomm a licensing fees based on a percentage of the selling price; rather it made more sense to cap the fees to a certain fixed dollar amount per phone. Apple’s second complaint was that Qualcomm was charging them both licensing fees for technology as well as for modem chipsets based on that technology; essentially amounting to what Apple called as “double dipping”.
So, based on those arguments, Apple started asking its contract manufacturers (like Foxconn) to withhold licensing payments to Qualcomm. Also, it started using chipsets from Intel for its cellphones (and iPads) for many models.
Litigation in many jurisdictions (US, Europe, etc.) ensued and both companies were embroiled in a bruising legal battle (more so for Qualcomm) for a couple of years. And just as the case was coming to a key jury trial in the US, both companies announced a comprehensive settlement and end to all pending litigation. Apple will pay Qualcomm an undisclosed settlement amount; in addition, will pay continued licensing fees for its technology and will also use its chips; for six years (with an option to extend for another two).
Why did Apple settle? First, perhaps, it didn’t see a strong case for winning, and Qualcomm was flexible in meeting them half way on the amount of the licensing fees. Secondly, Qualcomm chipsets are more advanced; especially with the upcoming 5G technology; it is believed Intel’s5G chipsets are at least a year behind in technology compared to those of Qualcomm. Apple, for obvious grounds, didn’t want to be left behind in the 5G race and cease ground to the likes of Samsung and Huawei (who already have 5G cellphone models out in the market).
Qualcomm jumped close to 30% on 04/16 and 04/17 on the news. I had about 10% of my portfolio invested in the stock and even though I’m sitting on a nice chunk of unrealized gains; it is not enough to quit my day job.
If I was wise enough, I probably should have bet the farm on the stock; but hindsight is always 20-20.
I had started investing in Qualcomm about a year ago.. not only because I believed the company had a technological edge and a great business model with its cellular intellectual property; but also because it seemed to be a company which believed in its potential and its value; the company paid a nice dividend and subsequent to its failed acquisition of NXP ( a Dutch chip company mainly in chips for automobiles); Qualcomm used its money reserves to buy back its stock for close to $30B ; thereby reducing its share count by close to a third.
Also, I believed, that there would be a favorable resolution to the dispute with Apple. With the upcoming 5G technology, Qualcomm should be a key beneficiary with its adoption; it holds multiple patents for that technology. However, Huawei has been a strong competitor in recent years; holding multiple patents on the 5G technology itself; it will be interesting to see how that battle unfolds in the coming years.