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Morningstar | Qualcomm Remains Shrouded in Uncertainty with Unfavorable Ruling; Negative Moat Trend Validated

We expect Qualcomm’s licensing business, the driver of the firm’s narrow moat rating, to see solid growth, due to our expectation of continued 4G penetration while 5G appears to be another strong opportunity as the technology ramps in 2020 and beyond. However, recent government investigations into the business model have increased the possibility of negative effects on royalty revenue, reflected in our negative moat trend rating, even in light of the company's recent settlement with Apple. Nonetheless, Qualcomm has been able to withstand these inquiries and maintain adequate royalty rates, and we think this will continue over time.Qualcomm is first and foremost the steward of patents associated with wireless communications technologies, originally in third-generation, or 3G, CDMA networks and, later, in 4G LTE networks commonplace today. Qualcomm’s treasure trove of patents in 3G and 4G allows the firm to charge device-makers a royalty fee as a percentage of the price of each 3G and 4G device sold (as most 4G phones are backward-compatible with 3G). Qualcomm also appears to be on the forefront in 5G network development. In addition to licensing its IP portfolio, the firm designs chips used in smartphones. This part of the business does not have nearly as strong of a competitive advantage as licensing, nor is it as profitable. Qualcomm’s high-end Snapdragon application processors are commonplace in high-end Android smartphones, though OEMs have sought to replicate Apple’s strategy of developing in-house chips. Despite the threat to Qualcomm’s position, the firm has done a solid job of maintaining business at major OEMs such as Samsung, though we think there will be fewer lucrative opportunities going forward.The firm has historically held a competitive edge in baseband chips, which are critical to devices’ inherent ubiquitous connectivity. Qualcomm had been the sole baseband supplier at Apple for multiple iterations of the iPhone, before Intel won a portion of this business. As 5G proliferates in coming years, we expect Qualcomm to regain its baseband position in the iPhone, while it also pivots into non-smartphone areas such as automotive and Internet of Things.