According to the news report by MarketWatch, Qualcomm Inc.’s stocks continued to decline for a second day in a row after the court ruling on Wednesday, May 22, that the chip manufacturer had violated an antitrust law.
This ruling led analysts on Wall Street to respond with downgrading and cutting the price on the company’s stocks amid uncertainty that such a decision could lead to a halving of Qualcomm’s earnings.
On late Tuesday evening in San Jose, the US District Court Judge Lucy Koh support the FTC’s (Federal Trade Commission’s) antitrust lawsuit against Qualcomm. Judge Koh stated that the chip maker had violated antitrust laws by eliminating rivals and charging unfairly high royalties for its patents.
The judge questioned the company’s practice of making billions of dollars by charging smartphone makers royalties on the percentage of their phones’ prices. Judge Koh also stated that with the lead the company had in the development of 5G technology, it was likely the company would continue with its behavior.
In her ruling, Judge Koh ordered Qualcomm to either renegotiate or negotiate its licensing agreements with its customers – without the use of unfair practices like threatening not to supply chips.
Added to that, the chip maker was also ordered to license its patents to competition at reasonable prices, and it was not longer allowed to enter into exclusive supply agreements with phone makers such as Apple, which blocked its competition from selling chips to the same company.
After this ruling, the company’s stocks plunged by as much as 11% on Wednesday, followed by another 4% on Thursday. For the week, Qualcomm’s shares have fallen by 18%.
One Wall Street analyst has already downgraded Qualcomm’s rating, and another eight have lowered that share price targets for the chip maker.
Vijay Rakesh, Mizuho’s analyst reduced his rating on the company from buy to neutral, and also lowered his price target from $90 per share to $65 per share. Rakesh stated that the FTC lawsuit’s ruling could reduce the chip maker’s earnings by as much as 50%, or even more, in a worst-case scenario.
The analyst also stated that this ruling also cast huge uncertainty on Qualcomm’s licensing model of charging royalties on a percentage of the average sale price of a smartphone.
Cowen’s analyst Matthew Ramsay maintained his Outperform rating for the company, however reduced the share price target from $100 to $80 per share. He said that if the chip maker had to renegotiate all its contracts, it was unclear how long this process would take and what the process would look like.
Ramsay said that while Qualcomm had the right to appeal the ruling and was well positioned to do so, customers’ reactions – especially due to the escalating trade tensions between the US and China – were an unknown. This situation was also particularly risky for the company.
Susquehanna’s analyst Christopher Rolland also kept his rating, but followed suit in lowering his price target from $100 to $85 per share. He said that an appeal by Qualcomm could take years and that the ruling was probably going to hurt the company’s profitability.
Rolland also commented on Apple’s long-standing dispute with Qualcomm on this very matter, stating that the iPhone maker would probably now have the opportunity to renegotiate its long-term contract with the chip maker, but it was possible that Apple would want to break the multi-year agreement and opt for another supplier.
However, he expected the tech giant to tread carefully with the Qualcomm, since the chip maker was far ahead of its competition in 5G technology, and the iPhone maker needed to release a 5G smartphone by 2020.