For the last several years, Qualcomm has been a pretty safe bet when it comes to stocks, as evidenced by its inclusion in high profile mutual funds with companies like Fidelity and Vanguard that pride themselves on maintaining a sterling reputation and stable investment portfolios. Qualcomm has had its share of legal troubles, but it has paid the penalties and moved on.
It may therefore come as a surprise that activist investor Sahm Adrangi has chosen to take a short position against the tech giant. What does Kerrisdale see in the pipeline, and how could it help other investors with a stake in Qualcomm?
Sahm Adrangi’s Reputation
Sahm Adrangi is the founder and Chief Investment Officer of Kerrisdale Capital Management, a company that he launched in 2009 with less than a million dollars and grew to $150 million in managed assets by 2017. His bread and butter are misunderstood stocks like underfollowed longs and overhyped shorts, and he has built a strong reputation for capitalizing on high-profile short sales, starting with exposing fraudulent Chinese internet companies as far back as 2010.
Qualcomm’s Checkered History
Qualcomm, launched in 1985, quickly rose to prominence in the arena of satellite communications and funneled early successes into research and development of CDMA technologies associated with cell phone networks, particularly microchips. The company’s focus on obtaining patents became a primary drive and a major source of income, thanks to the rapidly growing mobile marketplace, and later forays into the internet of things (connected cars, wearable devices, etc.) would further solidify the company as a tech and communications giant.
Qualcomm’s success was not entirely unhindered, however, and the company faced several lawsuits over the years, most notably for antitrust violations, including anticompetitive practices related to its patented premium LTE modem chip. With a slew of new lawsuits in the works, it seems that Qualcomm could face crippling losses in the near future, which Adrangi contends could cut the value of its stocks by half.
The Current State of Affairs
Of the lawsuits Qualcomm is currently facing, the one launched by the U.S. Federal Trade Commission is the most troubling. According to Kerrisdale, a loss in this case could mean that Qualcomm has to “license core patents to competitors and to renegotiate all of its existing licenses on fair terms.” The likelihood of a win for the FTC is high since the judge presiding over the case, Lucy Koh, has ruled against Qualcomm more than once already.
Adrangi says that “in the past, Qualcomm has been able to keep its business model going, but this time, the threats are far more severe.” He predicts that the company’s stock, currently at $54.16, could fall by as much as half in the next 1-2 years if Qualcomm loses key legal battles. Considering Adrangi’s past successes and the fact that Kerrisdale boasted a 37 percent gain in 2018, while the average hedge fund posted losses of 4.5 percent, there may be a lot of investors following his lead.