Qualcomm's licensing business is a profit-making machine. Almost every time a smartphone is sold, the chipmaker gets a cut, because of its patents on communications standards.
Investors love it. Qualcomm is among the world's biggest tech hardware companies, and one-third of its revenue — or almost $8 billion in 2016 — comes from high-margin licenses. Over the past five years, the company has traded for an average of close to 18 times profit, compared with about 13 times for chipmaker Intel, according to FactSet.
But Apple's $1 billion lawsuit filed against Qualcomm on Friday shows the risks of that dependence, sending the stock down 13 percent Monday.
Apple claimed that Qualcomm has been "charging royalties for technologies they have nothing to do with." That followed a lawsuit from the U.S. Federal Trade Commission earlier last week and investigations launched in 2015 by South Korea and Taiwan, all questioning whether Qualcomm's charges are fair and reasonable.
"The licensing business is under attack on multiple fronts, from both governments and now Qualcomm's own customers," said Stacy Rasgon, an analyst at Bernstein Research who recommends holding the shares. "Nobody likes to pay royalties, but most held their noses and did. Now they seem less likely to pay those rates, and are fighting back."
A Qualcomm spokesperson called Apple's claims "baseless" and said in an e-mailed statement that Apple "intentionally mischaracterized our agreements and negotiations, as well as the enormity and value of the technology we have invented, contributed and shared with all mobile device makers through our licensing program."