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If you think politics is nasty, you should check out the tech sector.
This is a business that has more suits than a tuxedo factory. Whether it's patent infringement, intellectual property or anticompetitive practices, if the government gets involved, somebody's always going to court.
Wireless-chip maker Qualcomm (QCOM) is currently butting heads with U.K.-based Arm Holdings (ARM) , which canceled a license that allowed its longtime partner to use Arm's intellectual property to design chips, Bloomberg reported on Oct. 22.
Arm, a semiconductor and software design company, has given Qualcomm a mandated 60-day notice of the cancellation of their architectural license agreement, which allows Qualcomm to create its own chips based on standards owned by Arm.
The move ratchets up a legal fight that began in 2022, when Arm sued Qualcomm — one of its biggest customers — for breach of contract and trademark infringement.
The two companies are headed to a trial to resolve the breach-of-contract claim by Arm and a countersuit by Qualcomm.
Trader: Uncertainty about QCOM stock
The disagreement centers on Qualcomm’s 2021 acquisition of another Arm licensee and a failure — according to Arm — to renegotiate contract terms.
Qualcomm argued that its existing agreement covers the activities of the company that it purchased, the chip-design startup Nuvia.
Both Qualcomm and Arm are scheduled to report quarterly results on Nov. 6.
TheStreet Pro's Chris Versace said that even if the two companies ultimately go to trial, the possibility of a deal remains, "which means we will have to monitor developments closely."
"That means parsing their September-quarter earnings call comments, even though they are likely to be minimal," the veteran trader wrote on Oct. 23.
"The thing is, Nuvia’s work and the continued work as a part of Qualcomm is central to new chips being sold by Qualcomm into the PC industry as part of its [artificial intelligence personal computer] efforts."
Qualcomm recently said it would incorporate Nuvia’s work into its Snapdragon chips for smartphones, Versace said, "shoring up its competitive position as AI bleeds into that market as well."
He added that this latest development was likely to bring a larger cloud of uncertainty over Qualcomm’s shares "that won’t be lifted until we know the outcome."
Versace noted that Qualcomm "is no piker when it comes to legal battles," especially given its own licensing business, having bested Apple (AAPL) in 2019 and winning a court decision on appeal against the U.S. Trade Commission.
Citi analysts said on Oct. 23 that they did not expect Qualcomm to halt shipment of any chips, according to The Fly.
The firm said that the case could potentially head to the courts and Qualcomm would end up paying Arm a higher royalty, which would hurt Qualcomm's margins.
Cit also said it would not expect any such impact to be material to Qualcomm as "perhaps a low-single-digit" percentage at worst,
However, the investment firm also said that the situation could be "dragged out for a while." And would not expect a decision any time soon given previous court battles over royalties.
Analyst: Qualcomm challenged in smartphone market
Citi has a neutral rating on Qualcomm and sees near-term downside risk to the stock due to softness in the wireless end market.
Qualcomm's shares are up 15.5% year-to-date and nearly 40% from a year ago.
"It is hard to get a feel for the direction of Qualcomm," TheStreet Pro's Bob Lang wrote in his Nov. 4 column. "The stock remains stuck in neutral, often testing the $165 level on the low end while refusing to move above $180."
"Without question Qualcomm is ready to break out of this range it has been trapped in since early August," he added. "Three months is a long time, but we'll wait for it to happen rather than predict it."
Qualcomm, a maker of processors and other parts for handsets, in a July report beat Wall Street's earnings forecasts for the fiscal third quarter ended June 23. Revenue from sales of handsets — the company's biggest business — rose 12% from the year-earlier period to $5.9 billion. Overall revenue rose 11% to $9.39 billion.
President and Chief Executive Cristiano Amon told analysts that “we're pleased with the growth and trajectory of AI use cases on smartphones.“
“This continued expansion of AI features is a precursor to next-generation smartphones, which we believe will become AI-centric with pervasive on-device AI working across applications in the cloud,” he said.
“Qualcomm is very well-positioned to help drive this transformation across the industry in the coming years.”
On Nov. 5 JP Morgan analysts lowered their price target on Qualcomm to $195 from $210 and affirmed an overweight rating on the shares as part of a Q3 earnings preview.
The firm said Qualcomm is challenged by the lack of recovery in the smartphone market.
Counterpoint Research said in a May report that U.S. smartphone shipments declined 8% in the first quarter of 2024 from a year earlier. The downward move reflected stronger Q1 2023 shipments: Covid-19-related factory closures had pushed Apple shipments from fourth-quarter 2022 into first-quarter 2023.
JP Morgan said, however, that despite the softer outlook for the specific end-markets Qualcomm is involved in, it believes "conservative" near-term forecasts are less affected.
