QUALCOMM, Inc. (QCOM): Wedgewood Capital Still Loves Chipmaker

QUALCOMM, Inc. (NASDAQ:QCOM) remains the favorite technology stock of Wedgewood Capital despite its share price falling over 22% this year mainly due to an ongoing legal battle with Apple and other regulatory issues. In its 2017 Q3 investor letter (you can download a copy here), Wedgewood Capital discussed why it has a bullish viewpoint on the chipmaker. QUALCOMM is also a popular stock among other hedge funds in Insider Monkey’s database. There were 41 funds that held bullish positions in the chipmaker as of the end of the second quarter, including Baupost Group, Harris Associates, and Adage Capital Management.

Here is Wedgewood Capital’s investment thesis on QUALCOMM, Inc. (NASDAQ:QCOM).

Qualcomm’s stock continues to be stuck in lawsuit purgatory. Ironies abound. A judge says Apple doesn’t have to pay Qualcomm, even though Apple admits they owe Qualcomm at least $4 per phone. The FTC says Qualcomm is violating antitrust, even though the head of the FTC admits Qualcomm isn’t violating antitrust. Both Companies have been quite public in their respective legal positions. Apple is adamant about letting a judge decide on a fair price (or royalty rate) from them to pay for Qualcomm’s technology. Qualcomm is just as adamant that they will once again go to great lengths to defend what they believe is a fair market price for their technology. The public posturing from Apple’s CEO Cook seems to imply that Apple is in no hurry to reach an out-of-court settlement. Qualcomm’s CEO Mollenkopf continues to expect an out-of-court settlement.

Our main position in holding the stock throughout this turmoil is that we cannot conceive that a U.S. court (judge) would rule that a U.S. company’s patent estate can be rendered virtually worthless. In addition, at the stock’s current valuation, the market, in our view, has priced in either an onerous settlement with Apple or an onerous settlement that for all practical purposes emasculates Qualcomm’s cash-cow royalty business. We believe either extreme is unlikely. Furthermore, the risk/reward for Qualcomm’s stock (currently in the low $50’s), again in our view, is significantly asymmetric to the upside, particularly in a world where other notable semiconductor companies such as NVidia and Broadcom sport market caps of over $110 billion and over $105 billion, respectively – and both on lower revenues and profits than Qualcomm.

Last, we believe that the market is giving little benefit for the earnings accretion of the Company’s planned year-end closing of their +$47 billion acquisition of NXP Semiconductor. The Company has obtained regulatory clearance in four jurisdictions, including the U.S. and Taiwan, and is still working on clearances from five other regions consisting of the EU, China, Japan, South Korea, and the Philippines. Just recently the Company has offered NXP-owned patent concessions to win regulatory approval in the EU.

The legal battle continues between QUALCOMM, Inc. (NASDAQ:QCOM) and Apple over licensing for modem chips. Apple alleged that Qualcomm is charging unfair prices for the chips which provide data connectivity in iPhones. The Cupertino-based tech giant filed 11 separate lawsuits against QUALCOMM, Inc. (NASDAQ:QCOM) and its subsidiaries in the United Kingdom, Japan, China and Taiwan. At the same time, Qualcomm is also taking legal actions against Apple. Recently the chipmaker filed a law against in China, seeking a ban on the manufacturing and sale of iPhones in the country.

Kārlis Dambrāns/Flickr

Kārlis Dambrāns/Flickr

In addition, QUALCOMM, Inc. (NASDAQ:QCOM) is facing ongoing antitrust probes in the U.S. and Europe. Recently, the Taiwanese Fair Trade Commission imposed more than $770 million fine on the chipmaker for unfairly manipulating prices and intentionally hampering its rivalry.

QUALCOMM, Inc. (NASDAQ:QCOM) is expecting to close its deal to acquire all of the issued and outstanding common shares of NXP Semiconductors NV (NASDAQ:NXPI) for $110.00 per share or around $47 billion in cash. This acquisition is very important to QUALCOMM. It is expected to give a significant amount of revenue and cash flow to the chipmaker and will help it to expand its revenue stream and become less reliant Apple and Samsung for revenues. The deal is subject to receipt of regulatory approvals in various jurisdictions and other closing conditions.

Meanwhile, Wedgewood Capital also discussed its investment thesis on other companies in the letter. We’ve already covered the fund’s investment theories on Alphabet and Cognizant Technology Solutions and Fastenal in other articles.