Qualcomm (QCOM -2.36%) shares have fallen over 20% this year due to a seemingly endless barrage of bad news. Government regulators are fining the chipmaker over its licensing practices, a bruising battle with Apple (AAPL -1.22%) is throttling its growth, and EU regulators are stalling its acquisition of NXP Semiconductors (NXPI -1.93%).
But even after taking those blows, I insisted that Qualcomm was worth holding since its low valuation and high dividend should limit its downside potential. However, three recent developments have shaken my faith in the company, and are causing me to reevaluate my original reasons for owning the stock.
Source: Getty Images.
Qualcomm isn't being straightforward with investors
In April, Apple suspended all licensing payments to Qualcomm, forcing the chipmaker to slash its guidance for the third quarter. At the time, many analysts speculated that Apple's bold move would encourage other leading OEMs to do the same thing, resulting in a "contagion" that would cripple its licensing business.
Bernstein analyst Stacy Rasgon recently pointed out that Qualcomm used radically different language to address that risk in conference calls and in the courtroom. During the conference call in July, Rasgon asked Qualcomm president Derek Aberle if there was risk that other licensees would stop paying royalties. Aberle replied: "I don't think... this is somehow going to result in a bunch of other licensees deciding not to report and pay royalties."
Huawei's P9. Source: Huawei.
But during an oral argument in court on Aug. 18, Qualcomm counsel Evan Chesler announced that "one of the largest handset manufacturers in the world" was "watching the Apple litigation and they are no longer paying us." Chesler didn't name the OEM, but noted that that second company and Apple manufactured "approximately one out of every four handsets" in the world.
Rasgon believes that OEM is Huawei, the third largest smartphone maker in the world after Samsung (NASDAQOTH: SSNLF) and Apple. This means that contrary to Qualcomm's earlier statements, the risk of contagion is actually very high -- and other big Chinese OEMs like Oppo and Vivo could follow suit.
Activist interference in the NXP merger
Qualcomm might solve most of its chipmaking and licensing problems by closing its merger with NXP, which will diversify its core business toward connected cars and away from mobile devices. Unfortunately, that deal remains in limbo due to an EU probe, and NXP shareholders haven't agreed to tender their shares yet.
At least 70% to 80% of those shareholders must tender their shares for the deal to be approved. Unfortunately, activist investor Elliot Management, which owns a 6% stake in NXP, has repeatedly stated that Qualcomm's $110 per share offer undervalues the company.
Elliot's opinion might be influencing other investors. In July, Susquehanna analysts reported that "some investors believe that Qualcomm should pay up to $130 per share for NXP." Therefore, closing the NXP deal doesn't seem like a sure thing anymore, even though CEO Steve Mollenkopf told investors that it remained "on track to close by the end of calendar 2017" during last quarter's conference call.
The South Korean precedent
Last December, Qualcomm was fined 1.03 trillion won (about $913 million) regarding its licensing practices. Qualcomm responded with two lawsuits in the Seoul High Court, one calling for a suspension of the order and another calling for the nullification of the regulator's decision.
The court recently rejected the suspension request, strongly indicating that Qualcomm would need to pay the fine. That fine, along with the $975 million fine it paid in China in late 2015 for similar reasons, sets a dangerous precedent by essentially telling other regulators and OEMs that their grievances are justified. As a result, Qualcomm could be hit by additional fines in other countries where it faces similar antitrust probes -- which include the U.S., Europe, and Taiwan.
Is it time to sell Qualcomm?
I think that it'd be a mistake to sell Qualcomm in a panic when the stock is near a 52-week low. But I also believe that the chipmaker faces some very tough questions about its long-term growth.
The jarring disparity between Qualcomm's comments to investors and judges, the alarming possibility of additional OEMs suspending licensing payments, its sluggish progress on the NXP merger, and the threat of additional fines are all reducing my faith in the company's management. If Qualcomm can't solve these issues soon, I'll consider selling my shares and investing in a more dependable "mature tech" plays instead.
