David Rolfe Comments on Qualcomm

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Oct 16, 2017

Qualcomm (NASDAQ:QCOM)’s stock continues to be stuck in lawsuit purgatory. Ironies abound. A judge says Apple doesn’t have to pay Qualcomm, even though Apple admits they owe Qualcomm at least $4 per phone. The FTC says Qualcomm is violating antitrust, even though the head of the FTC admits Qualcomm isn’t violating anti-trust. Both Companies have been quite public in their respective legal positions. Apple is adamant about letting a judge decide on a fair price (or royalty rate) from them to pay for Qualcomm’s technology. Qualcomm is just as adamant that they will once again go to great lengths to defend what they believe is a fair market price for their technology. The public posturing from Apple’s CEO Cook seems to imply that Apple is in no hurry to reach an out-of-court settlement. Qualcomm’s CEO Mollenkopf continues to expect an out -of-court settlement.

Our main position in holding the stock throughout this turmoil is that we cannot conceive that a U.S. court (judge) would rule that a U.S. company’s patent estate can be rendered virtually worthless. In addition, at the stock’s current valuation, the market, in our view, has priced in either an onerous settlement with Apple or an onerous settlement that for all practical purposes emasculates Qualcomm’s cash-cow royalty business. We believe either extreme is unlikely. Furthermore, the risk/reward for Qualcomm’s stock (currently in the low $50’s), again in our view, is significantly asymmetric to the upside, particularly in a world were other notable semiconductor companies such as NVidia and Broadcom sport market caps of over $110 billion and over $105 billion, respectively – and both on lower revenues and profits than Qualcomm.

Last, we believe that the market is giving little benefit for the earnings accretion of the Company’s planned year-end closing of their +$47 billion acquisition of NXP Semiconductor. The Company has obtained regulatory clearance in four jurisdictions, including the U.S. and Taiwan, and is still working on clearances from five other regions consisting of the EU, China, Japan, South Korea, and the Philippines. Just recently the Company has offered NXP-owned patent concessions to win regulatory approval in the EU.

From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 3rd quarter shareholder letter.