Here's Why Qualcomm's (QCOM) Share Price Went Down 6.2%

Shares of Qualcomm (NASDAQ:QCOM) declined 6.18% to $61.88 on Feb 5.

The decline was led by Qualcomm’s apprehensions of losing share in the chipset market and various license disputes.

Let’s take a look at each of the aforementioned factors.

Will Qualcomm Lose Chipset Market Dominance?

Tech giant Apple (NASDAQ:AAPL) is reportedly looking for alternative chipset suppliers for its next-generation iPhones. Apple might choose Intel (NASDAQ:INTC) for its comparatively less-expensive modem chips. Notably, a shift to Intel will help Apple save around $105 million. This will help Apple reduce production costs for the next-generation iPhones, which will lower retail price.

Additionally, Qualcomm is engaged in an ongoing year-long $1-billion lawsuit related to licensing royalty payments with Apple. The dispute continues to get bitter with multiple counter moves from the companies. Also, Apple is one of the major buyers of Qualcomm’s chipsets. To this end, Qualcomm CDMA Technologies (“QCT”) segment accounts for more than 70% of total revenues. The segment reports operating results for chipset sales and system software for wireless voice and data communications. This segment accounted for 76.65% of total revenues in first-quarter fiscal 2018. Qualcomm will face a major loss if Apple discards its chipsets.

Meanwhile, Broadcom Limited (NASDAQ:AVGO) , which is planning to acquire Qualcomm, is likely to face the risk of being left out of Apple’s ecosystem. Apple is expected to shift from Broadcom to Qorvo or STMicroelectronics, to opt for high-frequency filtering technology or wireless charging in its 12th-generation handsets.

We believe that Apple is moving from 'best available' to 'good enough' to maintain standard iPhone functionality.

Product Licensee Disputes

Qualcomm’s first-quarter fiscal 2018 and fourth-quarter fiscal 2017 GAAP and Non-GAAP results were affected by the dispute with Apple and its contract manufacturers as well as the previously disclosed dispute with another licensee. In first-quarter fiscal 2018, Qualcomm Technology Licensing (“QTL”) segment generated revenues of $1,299 million, down 28% year over year. EBT margin was 68% compared with 85% in the prior-year quarter. The aforementioned factors have led to the disappointing performance of the QTL segment. The first quarter of fiscal 2018 GAAP results include $6.0 billion charge or $4.03 per share, related to the enactment of the Tax Cuts and Jobs Act (the Tax Legislation) in the United States and $1.2 billion charge or 76 cents imposed by the European Commission (EC). Qualcomm’s licensees are likely to take such actions until the disputes are resolved.

Zacks Rank & Price Performance

On Feb 6, Qualcomm has been downgraded to a Zacks Rank #4 (Sell) from Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, Qualcomm has been portraying a disappointing price performance in the past three months. The company’s shares have declined 3.7% against the industry’s rally of 0.3%.

When compared with the market at large, the stock compares unfavorably with the S&P 500 index’s rally of 2.3%.

Our Take

Qualcomm’s diverse product portfolio in the semiconductor business instills optimism. Qualcomm is one of the largest manufacturer of wireless chipset based on baseband technology. The company has been striving to retain its leadership in 5G, chipset market and mobile connectivity with multiple technological achievements and launches. Qualcomm, Verizon and Ericsson (BS:ERICAs) jointly completed the first Massive MIMO (Multiple Input-Multiple Output) trial with a fully-compatible customer device. Qualcomm achieved a 5G data connection with the Snapdragon X50 5G modem chipset on 28GHz mmWave spectrum. Additionally, Qualcomm is teaming with Verizon and Novatel Wireless for 5G NR mmWave technology trial. Notably, Qualcomm Technologies has been at the forefront of driving Gigabit LTE and 5G in the industry.

Recently, Qualcomm received regulatory nod from South Korea’s Fair Trade Commission and European Commission for the pending NXP Semiconductors (NASDAQ:NXPI) buyout. China is yet to approve the deal.

Despite the ongoing lawsuit, it is unlikely that Qualcomm will be completely out of Apple's ecosystem. This is because the company’s 5G technologies are likely to surpass Intel's, which will put Qualcomm in a competitive position.

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