We are less concerned about the fine itself; rather, the existing licensing agreements held by Qualcomm are at risk.
By Abhinav Davuluri | 12-29-16 | 12:00 PM | Email Article

On Dec. 27, South Korea’s Fair Trade Commission announced its decision regarding its investigation of  Qualcomm , concluding that certain business practices related to the firm’s licensing agreements are in violation of Korean competition law. In addition to a fine of KRW 1.03 trillion (approximately $865 million), the FTC intends to issue a corrective order relating to the practices in question, which will not be disclosed for at least a few weeks, if not months.

Abhinav Davuluri is an equity analyst for Morningstar.

For Qualcomm, we are less concerned about the fine itself, as the firm has a substantial cash hoard ($32.4 billion at the end of September). However, the existing licensing agreements held by Qualcomm are at risk, and we surmise South Korea’s FTC could pursue revisions similar to those by China’s National Development and Reform Commission in 2015, in which Qualcomm’s royalties were calculated off a lower base and the firm’s patent pool was separated between essential and nonessential patents. This outcome would be significantly better than the alternative (royalties being calculated on certain components as opposed to the overall average selling price of the device). Furthermore, we don’t expect the corrective order to be severely detrimental to Qualcomm financially, as royalties for handset sales into South Korea accounted for less than 3% of the firm’s licensing revenue in fiscal 2016. Our narrow moat and negative moat trend ratings consider the potential for other regulatory agencies to follow suit in existing or new investigations, with ongoing investigations in the United States, Japan, and Taiwan. We are maintaining our $72 fair value estimate and believe an appropriate margin of safety exists for potential investors.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Securities mentioned in this article

Ticker

Price($)

Change(%)
Morningstar Rating Morningstar Analyst Report
With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Abhinav Davuluri does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
Sponsored Links
Sponsor Center
Content Partners