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Shares of mobile chip giant Qualcomm (NASDAQ: QCOM) fell sharply on Monday as analysts downgraded the stock following news that Apple (NASDAQ: AAPL) was suing the company. This lawsuit came just a few days after the Federal Trade Commission formally charged Qualcomm over anti-competitive behavior. Qualcomm stock was down about 13% at 11:15 a.m. EST.
On Friday of last week, Apple accused Qualcomm of unfairly charging excessive royalties for its technology. Furthermore, Apple alleged that Qualcomm withheld $1 billion in payments as retaliation for Apple's cooperation with agencies investigating the company.
Just a few days earlier, the FTC filed a complaint in federal district court charging Qualcomm with "using anti-competitive tacticsto maintain its monopoly in the supply of a key semiconductor device used in cellphones and other consumer products." Specifically, the FTC alleges that Qualcomm uses a "no license, no chips" policy, refuses to license standard-essential patents to competitors, and extracted exclusivity from Apple in exchange for reduced patent royalties in an effort to prevent Apple from working with its competitors.
Two analyst downgrades came on Monday following these developments. Nomura analyst Romit Shah downgraded Qualcomm stock to "neutral" due to the unexpected breadth of the lawsuits and the subsequent uncertainty surrounding Qualcomm's acquisition of NXP Semiconductors. CLSA also downgraded the stock to "underperform."
Qualcomm derives the bulk of its profits from its licensing business, which makes these two lawsuits particularly dangerous for the company. Both are an attack on Qualcomm's extremely lucrative business model, which could be upended in the worst-case scenario.
Qualcomm has disputed the FTC complaint, saying that it's based on a flawed legal theory, a lack of economic support, and significant misconceptions about the mobile technology industry. Qualcomm also dismissed the claims in Apple's lawsuit as baseless. These lawsuits will take time to play out, and changes to the FTC under the Trump administration could complicate things further. Investors are taking the threats seriously, though, erasing the gains made by shares of Qualcomm during the second half of 2016.
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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.