Please ensure Javascript is enabled for purposes of website accessibility

Qualcomm Inc. Gets Fined Nearly $800 Million in Taiwan

By Leo Sun - Oct 14, 2017 at 1:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The chipmaker faces a huge fine in its third largest market.

Qualcomm (QCOM 3.14%) was recently hit with a NT $23.4 billion ($774 million) fine by the Taiwanese Fair Trade Commission (FTC), which claims that the chipmaker unfairly manipulated prices and intentionally hampered its competition. This represents the commission's highest ever fine since its inception in 1992, and marks a big setback for the company in Taiwan, its third largest market after China and South Korea.

The FTC claims that Qualcomm holds a monopoly over the chip market with its baseband technologies; it either refused to license that tech to rival chipmakers or charged them unfavorable licensing fees. The commission is ordering Qualcomm to terminate its unfavorable contracts with competitors, along with exclusionary deals with OEMs that include rebates or discounts.

Qualcomm's Snapdragon 835 SoC compared to a penny.

Qualcomm's Snapdragon 835 SoC. Image source: Qualcomm.

Qualcomm claims that the fine "bears no rational relationship to the amount of Qualcomm's revenues or activities in Taiwan," and that it "will appeal the amount of the fine and the method used to calculate it." Last year, 12% of Qualcomm's revenues, or $2.8 billion, came from Taiwan. The commission claims that Qualcomm has been violating antitrust laws for "at least" seven years.

Another day, another headache for Qualcomm

Together, revenues from China, South Korea, and Taiwan accounted for 86% of Qualcomm's top line last year. Qualcomm has now been fined by regulators in all three countries over similar charges about its patent licensing practices.

In 2015, Qualcomm agreed to pay a $975 million fine in China over antitrust violations, and lowered its licensing fees for Chinese OEMs. Last year, the South Korean FTC fined Qualcomm 1.03 billion won ($910 million) over similar charges. The chipmaker continues to appeal that fine. Including the new Taiwanese fine, Qualcomm has been fined nearly $2.7 billion across its top markets in just two years, which is equivalent to nearly 12% of its projected revenues for the current year.

Unfortunately, the fines probably haven't ended yet. Qualcomm still faces ongoing antitrust probes in the US and Europe.

Qualcomm also faces a growing revolt among OEMs, many of which argued that the chipmaker's cut (up to 5%) of the wholesale price of every smartphone sold worldwide was too high. The most vocal critic is Apple (AAPL 2.62%), which suspended all royalty payments to Qualcomm earlier this year. That bold move inspired a second major OEM (most likely Huawei) to halt its payments as well. Those developments prompted Qualcomm's lawyer to dramatically declare that the company's "house is on fire" during a court hearing in August.

If the "house is on fire," shouldn't investors get out?

All these government probes and lawsuits target Qualcomm's licensing business, which generates the lion's share of its pre-tax profits. In previous years, that high-margin business supported its lower-margin chipmaking business, which was more vulnerable to the cyclical demand of mobile devices.

Analysts expect the ongoing pressure on its licensing business to cause its earnings to fall 6% this year and another 18% next year. If more governments fine Qualcomm and OEMs follow Apple's lead and suspend their royalty payments, those bleak estimates could still be too optimistic. That bottom decline could eventually cripple its dividend, since its payout ratio soared as its earnings fell:

QCOM Payout Ratio (TTM) Chart

Source: YCharts

Therefore, two common reasons for buying Qualcomm -- its "low" forward P/E of 16 and its high forward yield of 4.4% -- aren't compelling if its earnings keep falling and its payout ratio keeps rising. The constant stream of probes and fines could also endanger Qualcomm's planned takeover of NXP Semiconductors (NXPI 5.22%), which still hasn't been approved by NXP's shareholders or the European Commission.

If Qualcomm can't seal the NXP deal, it can't diversify its chipmaking and licensing businesses away from mobile devices -- which means that the ongoing war against its licensing business could cripple its long-term growth.

The writing's on the wall

It's hard to see Qualcomm winning its appeals in South Korea and Taiwan. It will likely need to pay those fines, agree to the terms set by the commissions, and reduce its licensing fees. Until it does that and offers investors a clearer picture of its future, I'd steer clear of this besieged chipmaker.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$146.99 (3.14%) $4.48
Apple Inc. Stock Quote
Apple Inc.
AAPL
$169.24 (2.62%) $4.32
NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
NXPI
$179.97 (5.22%) $8.93

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
373%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.