Qualcomm - Losses don't matter

Tuesday, March 4, 2008

Last week, Qualcomm was hit with two legal reverses, or so the perception is. Both rulings were related to Qualcomm's accusation that Nokia was infringing on its GSM patents. But both the ITC and a UK court declared that it was not the case. So, what happens next? The Qualcomm share price that so steadily went up and closed at $43.79 on Feb 27th (the highest the share has seen in the last six months) took more than a 9% hit to fall back around $40 now.

Seems fair, you would say. But you have to realize that GSM was never Qualcomm's center-piece. These lawsuits were just inserted in the first place to see if it can pull off a win or two that would have Nokia accelerating to a 3G licensing deal. The idea was that a couple of wins will enable the company to still demand close to a 5% royalty for 3G.

So is it really an issue if it did not win a few of these lawsuits? I would say no. As I have mentioned in my QCOM series on Sramana Mitra's site, the final royalty rate for 3G will likely be closer to 3%. This is perhaps a rate that both parties will be happy about (although the prolonged negotiations and arbitration seem to indicate that there is more to it than meets the eye.) Even at 3%, I valued QCOM at $44.60 with the caveat that this can only go up. So, at $40, the share is still being traded below its minimum intrinsic value. If anything, a win here and there would push the share to the 50's which the company is capable of pulling off through all its other aggressive initiatives (including LTE development.)

So in summary, Qualcomm hardly cares if it gets real royalty from GSM. Also, the share price drop is uncalled for. And the stock will see stability and price growth when the Nokia deal is struck.

Posted by Vijay Nagarajan at 9:00 AM  


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