Given its unresolved legal issues, and several large fines that hit its bottom line hard, it's to Qualcomm's (NASDAQ: QCOM) credit that its stock has held up so well in 2017. Unlike peers NVIDIA (NASDAQ: NVDA) and Intel (NASDAQ: INTC) -- both of which have enjoyed a stellar year -- the chipmaker has spent much of 2017 on the outside looking in.
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Uncertainty is anathema to investors, and unfortunately, that explains Qualcomm's share price woes in a nutshell. The company is no stranger to legal scuffles and penalties -- including the dispute with China that resulted in a $975 million settlement nearly three years ago. But so many lawsuits in such a short period of time? That, and their impact on profits, are why 2017 was a year Qualcomm and its shareholders would prefer to forget.
South Korea got the current slew of legal battles against Qualcomm started last year, accusing Qualcomm of charging unfair licensing fees for its many patents. That was resolved by Qualcomm paying a fine of $927 million in the first quarter of its fiscal 2017.
Next up was a dispute with BlackBerry that set Qualcomm back $940 million in its second quarter. Jumping on the bandwagon, the Taiwan Fair Trade Commission got in line for its own payday over patent licensing issues, which cost Qualcomm $778 million last quarter.
If those fines weren't painful enough, Qualcomm is still battling the U.S. Fair Trade Commission (FTC), which alleges the same wrongdoing as the other combatants. Finally, longtime smartphone customer Apple (NASDAQ: AAPL) and other licensees are withholding royalty payments to suppliers that make use of Qualcomm-patents in their components, which in turn are unable to pass those royalties on to Qualcomm.
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The dispute with Apple -- which continues to widen in scope -- is the one that really hurts. The other issues were solvable simply by writing a check on the $37.3 billion in cash and marketable securities on Qualcomm's balance sheet; but the withholding of licensing fees has wrought havoc on its operating income and earnings per share (EPS) -- numbers that are of high interest to Wall Street.
Last quarter's $5.9 billion in revenue was down a mere 5% year over year, but operating income nosedived 82% to $300 million from $1.8 billion. Not surprisingly, given its lack of highly profitable licensing revenue, EPS sank 90% to $0.11, a world away from last year's $1.07 a share.
Licensing revenue is Qualcomm's bread and butter, accounting for 68% of its earnings before taxes last quarter, but the $829 million it did receive was nearly half the $1.58 billion it generated a year ago.
The road ahead
Qualcomm has been down this legal path before, and will likely come to arrangements with Apple and the FTC, eventually. In the meantime, it is hardly resting on its laurels. Smartphone chips are still a key component of Qualcomm's total revenue, but to keep up with the NVIDIAs and Intels of the world, it's also diversifying its product suite.
It's at the forefront of the next wave of mobile connectivity: 5G. Not only does 5G offer smartphone users fiber-like speed at a lower cost, it is also a key component of Qualcomm's Internet of Things (IoT) efforts. NVIDIA and Intel are also deeply invested in the development of a host of IoT solutions, but Qualcomm is used to battling for market share, and can be expected to more than hold its own.
Artificial intelligence (AI) is another exploding market opportunity Qualcomm is tackling, and it has already developed a top-of-the-line AI platform. As is the case with its IoT solutions, those AI efforts will also benefit from its 5G leadership position. To further its product diversification efforts, Qualcomm recently invested an undisclosed amount in China-based AI facial-recognition developer Sense Time. And mobile computing represents yet another massive opportunity.
Bottom line: Once the legal smoke clears, the Qualcomm investors see will be well-positioned for long-term growth in multiple, fast-growing markets. As for 2017, it's a year best forgotten.
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Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Nvidia. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.