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Why Qualcomm Is a Teflon Stock


Qualcomm (QCOM) may be the oddest pariah in techdom. The chipmaker is loathed by many mobile-phone makers that design handsets around its technology. European regulators are investigating whether it charges excessive licensing fees. Nokia (NOK) earlier this year unilaterally slashed its payments to the chipmaker, and the two are facing off in 15 legal battles. And Qualcomm was forced to apologize when a U.S. magistrate accused the San Diego company and its lawyers of "gross misconduct on a massive scale" for concealing damaging information in a patent infringement case.

The weird thing is, investors don't seem to care. Qualcomm's stock, hovering near 40, has held up better than many chip stocks, and most analysts who cover the company say it's undervalued. The reason is, nobody else has numbers like these: $11 billion in royalties over the past seven years from licensing more than 5,000 patents to 150 companies. Handset makers such as Samsung and LG are using more and more of its chips and technology in their high-end phones. This fall, AT&T Mobility (T), the No. 1 U.S. wireless carrier, will join Verizon Wireless in giving customers the ability to watch live TV using Qualcomm's MediaFLO technology. And operators around the world are turning to Qualcomm for help when they offer customers games and location-based services, such as figuring out the quickest accident-free route to the airport. All told, analysts are predicting a 33% increase in earnings when the company reports on its full fiscal year on Nov. 8. "Why are people coming after us in the courts? Because we're winning in the marketplace," CEO Paul Jacobs says.

So what to make of the European Commission investigation, which was announced earlier this month? A hostile host of companies, including Ericsson (ERIC), Nokia, Broadcom, Texas Instruments (TXN), NEC (NIPNY), and Panasonic Mobile Communications (MC), has complained about Qualcomm's royalty fees for mobile-phone chips used on fast data networks. If the EC heeds their cries, it could impose fines of as much as 10% of annual revenue. In a worst-case scenario, it could break apart Qualcomm's chipmaking and licensing businesses.

But even on a fast track, the EC's investigation is likely to take more than a year, by which time Qualcomm's chips will be in billions more mobile devices. Meanwhile, Qualcomm is pouring money into research and development and buying companies that have core patents in WiMAX and other technologies that could take center stage over the next five years. Since phones using WiMAX still must work on voice networks, Qualcomm's revenues actually could increase over the long term, even if courts rein in fees it charges on some of its patents.

By Cliff Edwards, with Jennifer L. Schenker


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