What Impact Will Judge Koh’s Ruling Have On Qualcomm’s (QCOM) Business Model?
Qualcomm (QCOM) received bad news from Judge Koh in the US District Court for the Northern District of California, as she denied Qualcomm’s motion to put the antitrust ruling on hold until the appeal process is completed. This decision will force Qualcomm to implement Koh’s remedies, which will fundamentally alter Qualcomm’s business model and cause Qualcomm “irreparable harm,” which is what the company argued unsuccessfully in this motion. Opposing the motion Qualcomm filed was the Federal Trade Commission (FTC) and other parties including LG and the App Association.
Deutsche Bank analyst Ross Seymore believes that Qualcomm’s litigation “cap[s] upside in QCOM shares until greater certainty can be discerned.” As a result, Seymore maintains his Hold rating and $80 price target on the stock. (To watch Seymore’s price target, click here)
Seymore notes that this negative ruling for Qualcomm was “unsurprising given Judge Koh was unlikely to grant a stay on her ruling.” The important question for Qualcomm is how the ruling and its five remedies will change things going forward for the company.
For Qualcomm’s QTL business, Seymore does “not expect the remedies to have much impact on the settlement with Apple.” The settlement was seen by Wall Street as a major success for Qualcomm’s 5G prospects, as it resulted in Intel canceling its plans to enter the 5G chipmaking market. Seymore does expect the ruling and subsequent remedies to impact Qualcomm’s ongoing negotiations with LG and Huawei. These negotiations are for CDMA, 4G, 5G, and new chip purchases. LG and Huawei are significant customers for Qualcomm, so Qualcomm may be forced to negotiate under the cloud of their old business model having been successfully challenged by the FTC under antitrust law. This weakens their bargaining power and the remedies restrict what terms the parties can agree to.
Qualcomm’s other business – QCT – will also be impacted by the ruling, says Ross Seymore. Seymore believes that “the requirement that QCOM license to modem chip suppliers … [will] have limited implications in the near to medium term as [Intel], the primary competitor to QCOM over the past few years, recently announced its exiting of this business.” However, in the long-term, an unsuccessful appeal of this ruling could invite new competitors that could threaten Qualcomm’s core business model.
Seymore predicts that Qualcomm will provide clarification on the impact of this ruling in their upcoming earnings call. He thinks that the uncertainty means that investors should wait on the sidelines right now. TipRanks analysis of 24 analyst ratings for Qualcomm shows that Wall Street overall is slightly more bullish than Seymore on QCOM, with 14 analysts Buying, 9 Holding, and 1 Selling. The average price target on QCOM is $85.29, which represents an 11.3% upside on the current share price. (See QCOM’s price targets and analyst ratings on TipRanks)