Behind Qualcomm's Recent Downgrade
Regulatory concerns led us to downgrade the innovative tech firm's moat rating, says Morningstar's Brian Colello.
Regulatory concerns led us to downgrade the innovative tech firm's moat rating, says Morningstar's Brian Colello.
Brian Colello: We recently downgraded our moat rating for Qualcomm (QCOM) to narrow from wide. The reason why we did this is, as we think about wide-moat stocks, we think about them generating excess returns on capital with near certainty over the next decade.
We encountered a problem with Qualcomm as we think about them facing regulatory battles by various regulators across the world--but most notably in South Korea. The South Korea preliminary report suggests that Qualcomm's royalties, which have been somewhere between 3% to 5% of the price of the phone, could be based on a lower amount.
Now, we're not exactly sure what the amount might be. It might be the $10 price of the baseband chip that connects the phone to the network; it might be the price of all of the cellular components, so maybe that's $50 worth. It's hard to say. There is not a lot of clarity around what the royalty base might be for Qualcomm going forward. But again, we define wide-moat companies as generating excess returns with near certainty, and we don't have near certainty on how a regulator might rule against or in favor of Qualcomm.
We still think Qualcomm's IP is very solid. They have exceptional IP that has allowed them to get 3% to 5% of the price of the phone everywhere else for the past few years, and we think that will continue for the next decade or even 20 years. But because we view wide-moat stocks as being companies that will generate excess returns with near certainty, we can't rate Qualcomm's moat as wide because the regulatory outcome is naturally hard to predict.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.