Thursday, June 7, 2007

Is Qualcomm decline a buying opportunity?

Qualcomm (QCOM) engages in the design, development, manufacture, and marketing of digital wireless telecommunications products and services based on its Code Division Multiple Access (CDMA) technology. It receives significant revenue streams through royalties as well as through manufacturing of chips used in wireless applications. Its products are in wide usage in North and parts of South America, Japan, India and Korea and are generally viewed as cutting edge.

A key competitor to CDMA is GSM, which is prevalent in Europe, parts of Asia, parts of South America and Canada. GSM is considered an older technology. It cannot provide the speed or capacity that CDMA-based technologies offer. GSM systems, by their very technical nature, will eventually approach bandwidth limits.

GSM carriers are moving to a standard called UMTS or Universal Mobile Telecommunications System. This standard is based on WCDMA. WCDMA is short for Wideband-CDMA, a high-speed 3G mobile wireless technology that can offer higher data speeds than CDMA. WCDMA can reach speeds of up to 2 Mbps for voice, video, data and image transmission. Once again, Qualcomm patents are underlying this standard.

On a long term basis, all this seems quite positive for Qualcomm. The wireless world will be moving to use more Qualcomm products and designs. In the short term, however, there have been a host of negative legal developments in the news lately.

On May 29, Qualcomm was dealt yet another setback in its ongoing legal disagreements with wireless world heavyweights, including chipmaker Broadcom (BRCM) and cell-phone maker Nokia (NOK). A federal jury in California found Qualcomm guilty of infringing on three Broadcom patents, awarding $19.6 million in damages.

Separately, the U.S. International Trade Commission (ITC), which in late 2006 found Qualcomm guilty of infringing a different Broadcom patent, decided today, June 7, that new models of cell phones made with Qualcomm semiconductors can no longer be imported into the U.S. because the chips violate a patent held by Broadcom, a federal agency ruled Thursday.

The ITC said the import ban would not apply to mobile phone models that were imported on or before June 7.

The commission's decision represents a compromise between a ban on all phones with Qualcomm chips, as its rival Broadcom requested, and a ban only on the chips themselves, as recommended by an ITC administrative law judge late last year.

Broadcom's patent covers a battery-conserving feature used in mobile phones that transmit voice, video and data at high speeds.

The White House now has 60 days to approve or overturn the ruling. Qualcomm also could settle the patent dispute with Broadcom or appeal the decision to a federal court.

Pressure is mounting on Qualcomm to forge some kind of agreement with Broadcom. The carriers and handset manufactures who use Qualcomm's chips and intellectual property (IP) naturally wish to avoid any disruption to their businesses. In the US, affected carriers are Verizon Wireless, Sprint Nextel Corp. and AT&T Inc.'s AT&T Mobility, formerly Cingular.

So hopefully, all the bad news is now on the table. Between the legal decision today and the weakness in the stock due to the market sell-off this week, we could be very close to a low risk entry point.



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