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Sunday, August 12, 2007

Qualcomm - should you buy on bad news?

The old saying is that you should buy on bad news and sell on good news. Qualcomm (QCOM) has been pummeled with bad news lately.

A judge has doubled punitive damages in one of the patent infringement cases Qualcomm is embroiled in with Broadcom (BRCM). Apparently Qualcomm offered inaccurate testimony which also served to earn the judge's antipathy.

The White House failed to overturn the ITC ruling banning imports of handsets containing Qualcomm chips that infringe on still other patents held by Broadcom. To get around the problem, Verizon (VZ) broke away from the pack and inked an agreement directly with Broadcom.

The latest issue to crop up comes to us via Nokia (NOK). Qualcomm has been battling in the courts with Nokia for years over the level of royalty payments. Qualcomm licenses its CDMA 3G cell phone technology to Nokia who just happens to be the supplier of approximately 40% of the handsets sold worldwide. Nokia has just announced that it will no longer be manufacturing its own chips. It is selling its chip business to STMicro (STM) who will, in turn, supply the chips to Nokia. This expands STMicros business with Nokia substantially. In addition, Nokia will also bring on as suppliers Broadcom and Infineon (IFX) as well as continue its relationship with Texas Instruments (TXN). Note that Qualcomm is not included in this privileged set of chip vendors.

As a result of these developments, Qualcomm's stock has taken a beating, falling to $37.89 this week. It's chart is horrible with the stock falling below it's 200-day moving average and a bearish crossover in place as it's 20-day MA has fallen below the 50-day MA.

Sounds pretty cut and dry -- Qualcomm is a stock to sell or avoid, right?

Qualcomm's strength is, and continues to be, its patent portfolio. It owns the core patents related to the CDMA technology that many feel will eventually dominate cell phone technology. No matter who makes Nokia's CDMA chips, somebody ends up paying Qualcomm something.

Patent infringements should be considered a temporary blip. Qualcomm has already provided software work-arounds for some of the patents at issue with Broadcom, thus allowing the contested phones to be imported. This is not surprising. A good engineering staff can usually redesign or rework components to avoid patent issues if that's what needs to be done.

The call is starting to be heard for Qualcomm's chief executive, Paul Jacobs, to step down. I believe I read it first on the 24/7 Wall Street blog and I couldn't agree more. Someone who will get the legal issues behind the company is what is needed now, not a pitbull.

So what to do about the stock? Qualcomm could have further to fall, especially in the volatile market we are seeing lately. But I believe it will be a buy sooner rather than later. It recently reported good earnings and provided good forward guidance. And if its CEO is replaced, look for a big pop in the stock price.

Disclosure: QCOM is in our model portfolio

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