Qualcomm (NASDAQ:QCOM) was dealt a huge blow on May 21, when a U.S. District Court Judge sided with the Federal Trade Commission and ruled the company had violated antitrust laws. QCOM stock tanked as investors absorbed the prospect of Qualcomm seeing its patent royalties reduced to pennies just as business was ramping up in the race to 5G smartphones. However, since May 28 when QCOM filed a motion to stay the ruling while it appeals, the stock has been steadily gaining ground.
That trend has come to an end. Yesterday, both LG Electronics and the FTC filed motions in federal court, opposing QCOM’s request for business as usual while it prepares an appeal. As a result, QCOM stock is down 1.5% at the time of this writing.
Qualcomm Stock Hit By Latest FTC Filing
The prospect of being forced to adopt FRAND (fair, reasonable and non-discriminatory) terms for its smartphone modem-related technology patents would be a huge blow to Qualcomm’s revenue — and to Qualcomm stock. But that was the outcome of the FTC’s antitrust suit against Qualcomm. The Judge ruled that Qualcomm’s business model of collecting licensing fees from all smartphone manufacturers — regardless of whose cellular modem is in their product — was anticompetitive.
The ruling that QCOM would have to license the technology under a FRAND model meant the fees it collects from manufacturers would be slashed. In the company’s recent battle with Apple (NASDAQ:AAPL), the iPhone maker was fighting against paying a licensing fee of $7.50 per phone (on top of the $30 modem), instead of the $1.50 it had been holding out for. Under FRAND, the terms would likely be even lower than what Apple was pushing for. Qualcomm stock dropped like a rock after that ruling on May 21.
On May 28, Qualcomm filed a motion asking the judge to stay the ruling, while it files an appeal. That news kicked off two weeks of slow but steady gains for Qualcomm stock because if granted, the stay meant business as usual until the formal appeal is filed and heard. And that could take several years.
Yesterday, both the FTC and LG filed motions in federal court aimed at blocking Qualcomm’s request for a stay. LG noted in its filing that it is currently in negotiations with QCOM to renew a modem license that expires on June 30, adding urgency to the issue. The company says QCOM is pushing hard to ink a deal under the current monopolistic terms, aiming to lock LG into an expensive contract. QCOM stock has been down in pre-market trading, with investors worried about the prospect that this countermove could result in Qualcomm’s stay being denied — and the company’s licensing revenue being decimated by the immediate adoption of FRAND terms.
QCOM Stock’s Short-Lived Resurgence
When Qualcomm won its years-long legal battle with Apple in April, QCOM stock was on fire. Apple would surrender the licensing fees it had been withholding during the court case. Qualcomm’s revenue would be boosted by the licensing fee per iPhone Apple would now be paying under the new agreement. The icing on the cake? After dumping Qualcomm modems in favor of Intel (NASDAQ:INTC), Apple would go back to QCOM, and even in this era of stalling iPhone sales, that means another 40 million or more units per month, at $30 or so a pop.
As a result of that ruling, QCOM stock shot up 23% on the first day, eventually peaking at $89.29 in early May, a five-year high for QCOM.
Unfortunately for anyone who bought Qualcomm stock immediately after that win, the company’s challenges extend far beyond just Apple. The reaction of QCOM stock to the latest motion from the FTC shows just how much is riding on the final outcome of its antitrust case, and how important even the lead-up to the appeal will be for Qualcomm. The result of the latest FTC motion could mean the difference between several more years of current-level licensing revenue for Qualcomm during the appeal process, or an immediate imposition of FRAND terms.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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