Qualcomm Investors Look to Spherix, Other Peers in Patent Sector

Submitted by Jade Morgan as part of our contributors program.

Analysts at Trefis estimate that intellectual property revenues like royalties constitute 45.3% of Qualcomm’s (NASDAQ:QCOM) share price. Most of Qualcomm’s intellectual property relates to patented mobile technology, and the company’s $117 billion market capitalization is supported in large part by licensing fees from its patented property. Qualcomm’s enormous revenue stream from intellectual property validates the lucrative potential of the patent sector, investors have begun looking into other peers like Spherix (NASDAQ:SPEX) for comparative purposes.

As an operating corporation, Qualcomm generates revenue by selling chipsets. It sells physical chipsets to manufacturers of tablets and mobile devices like Apple, Samsung, Nokia and Motorola Mobility. However, a significant portion of Qualcomm’s revenue comes in the form of royalties, usually accompanying each chipset purchase order. Its customers agree that if they incorporate Qualcomm’s technology into a product and then sell that product, they must pay Qualcomm ongoing royalties. Typically, this is a small percentage of the selling price of the mobile device itself, and the pennies add up.

As a patent and intellectual property monetization entity, Qualcomm enjoys almost pure profits on this revenue. Indeed, the benefit of this type of business is the low operating costs and generous margins. Qualcomm licenses CDMA technology to other chipset manufacturers that wish to sell CDMA-based chipsets to mobile manufacturers. It also licenses its patented OFDMA protocols on which LTE/WiMax technology is based.

Patents are the hottest new business on Wall Street. Patent-related lawsuits, licensing revenues, royalties, and settlements have hit all-time highs. There were 30% more patent-related lawsuits last year than the prior year, and courts awarded several billion-dollar damages, each the largest patent damage awards that history had ever seen. Courts and businesses alike are recognizing the importance of patents, and companies like Qualcomm are taking advantage of the heightened activity.

Another company with a pure focus on intellectual property monetization that Qualcomm investors have for comparative purposes is Spherix (NASDAQ:SPEX). This company is suing defendants like T-Mobile, Uniden and V-Tech for patent infringement, and it is also acquiring more patents to monetize. Even more entrenched in the patent sector than Qualcomm, Spherix depends on patent monetization for almost 100% of its revenues, versus Qualcomm’s 45.3%. Last July, Spherix announced that it had would acquire a suite of patents from Rockstar Consortium, the owner of the world famous Nortel Networks patent portfolio. Spherix’s CEO explained clearly, “We will continue to strongly defend our intellectual property when it comes to those using our assets without a license.”

Spherix continues to identify new parties that it believes are infringing on its patents, and many Qualcomm investors wonder why their company does not begin offensive litigation to protect its patents, as well. Qualcomm’s large patent portfolio could provide a veritable windfall if it were to sue multinational mobility conglomerates for infringement. Spherix’s portfolios contain over 225 patents in areas such as wireless communications, satellite technology, and radio transmissions, yet Qualcomm’s patent portfolio contains thousands of patents.

Outsized returns for shareholders are certainly available in the intellectual property sector, and Spherix’s year-to-date stock chart shows how many double- and triple-digit opportunities are available for shareholders. Whether taking a new position in Spherix now or calling Qualcomm management to ask about the possibility of offensive monetization strategies, there is plenty of money to be made by investing in this sector.