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Qualcomm’s Addition by Subtraction

The ongoing saga of Qualcomm (QCOM) took a new twist last week when the company announced it was decreasing its revenue estimate for the current quarter by $500 million as a result of its escalating licensing dispute with Apple (AAPL). It appears that until the two tech titans reach a settlement, no royalty income will be paid to Qualcomm by any of Apple’s vendors.

Even for a company the size of Qualcomm, a half a billion dollars of lost revenue in one quarter is a lot of money. On an annualized basis it represents nearly 10% of Qualcomm’s total top-line revenue over the past twelve months, or more than half the total amount of its common stock cash dividend paid out for a full year. No matter how you look at it, the fact Qualcomm is definitely not getting this money now, and has no idea if it will not end up getting any of it later on, is bad news.

But there is one investment banker who seems to think this is somehow a good thing for Qualcomm, in that it eliminates any uncertainty over how much licensing revenue may be forthcoming from Apple. Using the trendy Wall Street euphemism “de-risked” to describe the recent turn of events, a Pacific Crest analyst posits that knowing Qualcomm will be getting no money at all from Apple is preferable to the possibility that might be getting an undefinable amount of money. At the same time, this analyst slashed his twelve-month share price target on QCOM from $77 to $68.

I don’t know about you, but I’d prefer getting paid some money for the work I do, even I don’t know exactly how much it will be until after the work has been performed, rather than knowing there is no chance I will be getting any money at all. I suspect this analyst does too, but does not want to admit to being on the wrong side of a trade that just took a wicked turn for the worse.

I concede that it will be easier for analysts to estimate Qualcomm’s future revenue stream if they know that it won’t be getting any income from one of its biggest customers, but I still don’t see how that is an advantage to anyone but Apple. Economic rationalization has long been an art form on Wall Street, but this twisted logic takes it to a whole new level. I’m pretty sure the same analyst would be ecstatic if Apple unexpectedly announced it would pay Qualcomm an extra $500 million this quarter, so being pleased with the opposite condition strikes me as irrational.

That’s why I sold Qualcomm out of the PF Growth Portfolio earlier this year, once the magnitude of its legal imbroglio with Apple became known. The opening line I wrote three months ago still sums up my view of Qualcomm’s senior management team; “Sometimes, I wonder what a CEO has to do to get fired.” Qualcomm has been leaking buckets of money ever since the new senior management team took over three years ago, and one of these days its board of directors is going to have to do something about that.

Until then, Qualcomm will remain an unpredictable wild card subject to the daily whims of hedge funds, day traders, and short sellers. I can even imagine a scenario where Warren Buffett intervenes to protect his huge investment in Apple, while also sniffing an opportunity to act as Qualcomm’s banker of last resort if they both sense it is losing its legal battle with Apple. But for the rest of us, Qualcomm is a stock better left unowned for the time being unless you happen to believe that nothing is better than something.


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