Is Qualcomm a Value Trap?

The last two years have been troublesome for Qualcomm (QCOM) as the chip maker has considerable amount of business. Qualcomm is still struggling and many investors believe that all the bad news is currently baked into Qualcomm’s current share price. Although Qualcomm is trading at a conservative valuation, the troubles keep on piling up for the company. The company recently became a target of Taiwan Fair Trade Commission. It looks like bad news is a never-ending phenomenon for Qualcomm and it may end up suffering because of it.

More troubles for Qualcomm

The evolution of 3G mobile technologies in India and China has been a big growth opportunity for the chip maker.
Qualcomm, for several years, held a leading position in the market of developing 3G Code Division Multiple Access technologies. In addition to that, the company recently developed an LTE chipset that supports Synchronous Code Division Multiple Access (SCDMA) technology. This new technology is used widely in China’s mobile network, and has the potential to offer the company with huge profits in the upcoming years. Qualcomm has signed several huge licensing deals in China that gave the company a rock solid boost.

Despite its solid performance in fourth quarter of 2015, the company faced new problems from the likes of LG Electronics, Inc. (LGE) and Taiwan Fair Trade Commission. In the starting week of December 2015, the TFTC informed Qualcomm that it is accompanying an investigation into its patent licensing provisions, which apparently disrupt the Taiwan Fair Trade Act (TFTA). This might have long-term effect on the company, as it adds to the list of various investigations currently running against the company.

In the same month, LG Electronics also filed a negotiation demand with the ICC, claiming that it overpaid royalties on assured CDMA subscriber units and appealing that the company disrupted its license agreement with LG Electronics. Due to these problems, the company’s Licensing Segment Revenue plunged 12 percent on an annual basis.

Conclusion

I think investors should stay on the sidelines at least for now. Investors should wait to see if the multiple investigations can have a long-term negative impact on Qualcomm before deciding to invest in the stock. Qualcomm may be trading at a conservative valuation, but it could turn out to be a value trap if the investigations take a serious turn in the near future. Given the current market sentiment, I think investors should stay on the sidelines.
Published on Feb 15, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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