Qualcomm (QCOM +1.31%) has been a tough stock to own over the past five years. Shares fell more than 10% as the NASDAQ doubled, as the chipmaker struggled with competition in mobile chips and ongoing attacks on its high-margin licensing business.
Qualcomm has taken some steps in the right direction -- like expanding into chips for wearable devices, drones, connected cars, and other Internet of Things gadgets -- but expectations for the company remain low. Analysts expect its revenue to fall 3% this year and for its earnings to dip 1%.
Image source: Qualcomm.
At times like these, investors might wonder if Qualcomm would fare better under new leadership with fresh tactics. Let's discuss four big mistakes Qualcomm made under current CEO Steven Mollenkopf, and whether or not a new leader could fix them.
1. Failing to boost shareholder value
Mollenkopf became Qualcomm's CEO on March 4, 2014. Qualcomm stock has declined 28% since that day, due to three major missteps. First, Qualcomm kept losing market share to Taiwanese chipmaker MediaTek's lower-end chips, while more OEMs -- like Huawei and Samsung -- started producing in-house chips.
Second, Samsung dropped Qualcomm's Snapdragon 810 from its flagship Galaxy devices in 2015, reportedly due to overheating issues. Lastly, Qualcomm's licensing business was hit by a series of probes, fines, and lawsuits -- most of which claimed that its licensing fees (up to 5% of an entire device's wholesale price) were unfair, since Qualcomm's tech was only utilized in certain components.
2. Complacent dependence on a wobbly business model
Mollenkopf and his predecessor, Paul Jacobs, should have prepared the company for these challenges by expanding earlier into adjacent markets. Instead, they seemingly believed that Qualcomm's high-margin licensing business could continually prop up its lower-margin chipmaking one without any long-term consequences.
But as smartphone margins declined, OEMs cried foul and demanded lower fees. Many Chinese OEMs underreported shipments to pay lower licensing fees. Chinese regulators sided with those companies, slapping Qualcomm with a $975 million fine in 2015 and forcing it to renegotiate lower licensing fees with each company. That ruling sparked a similar $873 million fine in South Korea and a fresh FTC suit against the chipmaker earlier this year -- which claims that Qualcomm leveraged the strength of its patent portfolio to push mobile chipmaking rivals out of the market.
Qualcomm realized that its profit engine was under fire, but it also couldn't skimp on R&D and marketing costs for its latest Snapdragon chipsets. This forced Qualcomm to spend more heavily (total expenses rose 16% annually during the first six months of 2017) -- even as total revenues dipped 3%.
3. Its escalating battle with Apple
Apple (AAPL +0.33%) also sued Qualcomm earlier this year, claiming that the chipmaker was withholding rebate payments (for using its baseband modems) for aiding the Korean FTC in the aforementioned probe. Apple also opposes Qualcomm's collection of licensing fees on the entire device's value. To further complicate matters, the FTC alleges that those payments -- which secured Apple as an exclusive Qualcomm customer from 2011 to 2016 -- were "bribes" that prevented Apple from using other baseband modems.
Image source: Apple.
Instead of defusing this toxic situation with one of its top customers, Qualcomm's management stood its ground and claimed that Apple violated the terms of its rebate agreement with its assistance in the Korean case.
Apple then sued Qualcomm in China and started withholding all licensing payments to the chipmaker. The latter blow forced Qualcomm to slash its third quarter revenue forecasts by $500 million.
The escalation of this battle might have been avoided if Qualcomm's management made concessions with Apple over their past five years of negotiations. Instead, Apple's move could now encourage other OEMs to stop paying licensing fees -- which would gut Qualcomm's licensing business.
4. Not heeding Jana Partners' advice
Activist investor Jana Partners repeatedly warned Qualcomm about using its licensing business to support its chipmaking business, and pushed the company to split into two halves. The licensing business would be streamlined and be able to acquire more patents as the company handles all the probes and litigation.
The stand-alone chipmaking business could either grow larger -- as it's doing now with the proposed buyout of NXP Semiconductors (NXPI +1.17%) -- or become a merger target for other giant chipmakers like Intel. Yet Qualcomm decided against a breakup in December 2015, and Jana wisely dumped most of its stake last February. Had Qualcomm's management heeded Jana's advice, the two companies might now be better insulated from antitrust charges.
But will Qualcomm change its ways?
I believe that Qualcomm would benefit from a management change, but I doubt that will happen in the middle of these probes and lawsuits and before the NXP deal closes. But after that smoke clears, the company might want to hire new leaders and reconsider Jana's suggestions about breaking up the company along its chipmaking and licensing lines.
