Betting on Qualcomm Inc should be an easy decision for an investor looking for wireless assets but the company's myriad legal battles could make it a risky choice compared with rivals like Nokia and Texas Instruments Inc.
Only one out of 29 Wall Street analysts urges investors to sell Qualcomm shares, according to Reuters Estimates. The rest recommend investors to buy or hold the stock because the company sells chips for the most prevalent third-generation (3G) high-speed wireless services.
But some investors and analysts are concerned that Qualcomm's protracted patent disputes with Nokia and Broadcom Corp make the stock a risky bet because of the difficulty of predicting court rulings.
An investor has to weigh it in its entirety. There's a large portion you really can't get any visibility to, Stifel Nicolaus analyst Cody Acree said, referring to uncertainty over how courts will rule on Qualcomm's patent disputes.
Acree said he prefers other wireless chip makers such as Texas Instruments, Skyworks Solutions Inc and STMicroelectronics over Qualcomm.
There are thousands of stocks you can invest in and many of them have better visibility, he said. Acree has buy ratings on Skyworks, STMicro and TI, and a hold rating on Qualcomm.
Qualcomm's share price has fallen about 20 percent from a 12-month high of $47.72 in May, mainly because of patent fights with Broadcom. One dispute resulted in a U.S. government ban on the import of some cell phones with Qualcomm chips -- a decision the company is seeking to appeal.
Qualcomm and Finland's Nokia have also been swapping legal barbs since they failed to renew a technology license pact that expired in April, an issue that concerns some investors even more than the Broadcom spats.
The legal issues are an overhang. They're an albatross around Qualcomm's neck, said Solaris Asset Management Chief Investment Officer Tim Ghriskey. You have to have a long investment horizon with an uncertain outcome at the other end ... Even as a long-term investor I would be suspicious.
Solaris has $1 billion under management. Ghriskey said one of the firm's investors has a small holding in Qualcomm but the firm is not planning to put any more money into the stock.
Ben Halliburton, chief investment officer of Tradition Capital Management which manages $525 million, picked Nokia over Qualcomm due to concern that the U.S. company will likely have to cede some royalty fees to resolve its legal battles.
We think their long term patent royalty stream is definitely going to have some compression, Halliburton said.
ROYALTY RATE RISK?
Despite concerns over the legal outlook for Qualcomm, its shares trade at about 18 times forecast 2008 earnings before unusual items, according to Reuters Estimates. That is comparable with Texas Instruments' 16 times and Skyworks' 14.
Those who like Qualcomm say the company has always managed to navigate its way out of tricky legal battles in the past, and that it remains in a strong position to capitalize on rapidly growing demand for advanced mobile networks.
There's no way you can make a 3G network work without their technology, said Keith Maher, an analyst at investment firm BB&T, which has Qualcomm shares among its roughly $17 billion investments.
Maher said Qualcomm is his favorite wireless stock because he expects it will be able to keep collecting royalties for phones using CDMA, the most widely used mobile standard in the United States, and W-CDMA, an increasingly popular high-speed wireless technology in Europe and around the world.
The question is whether Qualcomm will have to lower its licensing fees to reach agreements with Nokia and Broadcom, a move which could snowball into demands for lower fees from other companies in the wireless industry.
Qualcomm depends on royalties for 60 percent of its profit, according to analysts who say it receives 4.5 percent of the price of each phone using its patents. Even if this fell to 3 percent, Oppenheimer analyst Lawrence Harris said Qualcomm is still a good bet given the size of the global phone market.
Nariv Parikh, an analyst for TCW Group Inc -- Qualcomm's sixth-biggest institutional shareholder -- said the stock likely already priced in expectations of lower royalty fees.
Fundamentals have been strong and they continue to be strong but they're not being viewed in the stock at the moment because of the legal issue, Parikh said. TCW has $161 billion in assets.
JPMorgan analyst Ehud Gelblum is worried about the risk of a deeper cut in royalty fees. He has a neutral rating on Qualcomm's stock, saying Qualcomm may be forced to base its royalties on chip prices, not the full handset.
I do think there's a scary enough probability it leads to a change in the way that Qualcomm can charge royalties, he said.