EU Charges On Qualcomm Less Serious Than The Charges In Taiwan, South Korea and China

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Leading CDMA technology developer Qualcomm (NASDAQ:QCOM) has been slapped with antitrust charges by the European Commission this week for predatory pricing in the region and selling chips at a discount to a major customer for exclusively using its chips. [1] The latest charges have widened the ongoing antitrust charges that Qualcomm faces globally and they come just a month after the company faced allegations for similar charges in South Korea.  ((Read our “What Do The Latest Charges In South Korea Mean for Qualcomm?”)) Moreover, an investigation on Qualcomm’s licensing practices has been initiated in Taiwan by the Taiwan Fair Trade Commission (TFTC), as disclosed by the company. Earlier this year, Qualcomm paid litigation charges of $975 million to settle a regulatory investigation in China and had to lower the royalties it charges to licensees in the market. Investors have reacted negatively to the increasing number of antitrust charges, which has resulted in the stock declining more than 5%. In the section below, we examine how these charges can affect company’s business model going ahead.

Our price estimate of $65 for Qualcomm is approximately 32% above the current market price. We are in the process of updating our model in light of the recent events.

See our complete analysis for Qualcomm stock here

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EU Charges Less Serious As They May Not Affect Qualcomm’s Licensing Business

Although investors have reacted negatively to the latest allegations on Qualcomm by the European Commission, we see the charges less serious than the ones made in Taiwan, South Korea and China. The latter charges can affect company’s licensing business, which contributed by more than 70% to the company’s bottomline in the fiscal year 2015. If proven guilty in the latest charges by EU, Qualcomm might have to pay fines of as much as 10% of its global revenues and restrict some business practices in the region. However, even if EU decides to impose restrictions on Qualcomm’s business practices, the commision would likely do so on the company’s chipset business instead of the licensing business, as the charges are mainly related to company’s chipset sales. In this scenario, even if the company is debarred from selling chips in the region, it would continue to collect royalties at the existing rate from the smartphone sellers for using its technology. Qualcomm is the leading patent holder in mobile technologies, which has allowed the company to charge high royalty rates. The company’s CDMA patent portfolio is the most widely and extensively licensed portfolio in the industry.

On the contrary, in China, the company had to lower the royalty rates it charges to its customers in the region, after paying fines worth $975 million. In addition, the South Korean charges can be a serious blow to the company’s licensing business, as the company might have to charge royalty rates as a percentage of chipset price rather than the overall device sales price in the region. The average selling price of a Qualcomm MSM chipset is much lower compared to the average selling price of a 3G/4G device. Moreover, approximately 82% of the company’s global revenues in FY 2015 came from China, South Korea and Taiwan, while Europe’s contribution was much lower. Nevertheless, if the latest case is proven true, it would cast serious doubts in the mind of investors about the ethical standards and business practices followed by Qualcomm.

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Notes:
  1. EU slaps Qualcomm with antitrust charge, sandiegouniontribune, December 8, 2015 []