Famed short seller and activist investor Sahm Adrangi, best known for his scathing bearish reports on U.S.-listed Chinese companies, who went public through reverse mergers, has just announced his newest short position: chip-maker Qualcomm.
A report released on January 23, 2019, by Adrangi’s fund Kerrisdale Capital argues that destruction of the company as we know it is imminent due to the nature of Qualcomm’s licensing business being challenged by the Federal Trade Commission.
The FTC is currently accusing Qualcomm of operating a wireless chip monopoly. This is because Qualcomm owns several patents that are essential to the U.S. telecom industry. Qualcomm was issued these patents on the condition that it make patent licenses available on fair, reasonable, and non-discriminatory (FRAND) terms.
Because Qualcomm’s modem technology is vital to the assembly of a modern smartphone, phone companies have two choices, both of which involve paying Qualcomm. The first is buying Qualcomm chips, and the second is buying third-party chips that use technology which Qualcomm has patented, forcing them to pay licensing fees and a percentage of their sales.
If Qualcomm were to lose its case against the FTC, it would be forced to radically change its patent licensing, which would have a drastic effect on the profits it produces.
In Adrangi’s view, Qualcomm is very likely to lose its case against the FTC because Judge Lucy Koh, who is presiding over the trial, “has already ruled against Qualcomm on several critical matters, including rejecting its motion to dismiss the case and pre-determining (on the FTC’s motion for partial summary judgment) that Qualcomm is indeed obligated, as a matter of contract law, to license its key (so-called standard-essential) cellular patents to potential competitors like Intel on FRAND terms. Meanwhile, in a closely related consumer class-action lawsuit, Judge Koh allowed the case to move forward despite Qualcomm’s vehement objections, characterizing the evidence presented thus far to show that Qualcomm’s anticompetitive practices harmed consumers as ‘copious,’ ‘substantial,’ and ‘significant.’”
Confronted with all of this bearish data regarding Qualcomm’s outcome in its trial against the FTC, Adrangi has to reprice the company, which he thinks is already trading at a rich valuation. Assuming that the company is forced to restructure its licensing business by the FTC, Sahm sees a $2.1 billion drop in revenue. Based on historical multiples from the company and the industry, the stock price could drop by more than 60 percent.
Punishing Rent-Seeking Behavior
Sahm Adrangi and Kerrisdale Capital have a history of punishing perceived rent-seeking behavior by large companies, viewing them as great catalysts to open a short position against the company.
In 2016, Andrangi raised $100 million to short satellite company DISH Network, with the catalyst being the expiration of DISH’s AWS-4 license, which was granted to the company on the condition that it was going to build a wireless network using the spectrum granted to it by the FCC.
Adrangi and Kerrisdale accused DISH of sitting on the license in an attempt to sell it to a competitor before the license expired.
Stock Price Reaction
Kerrisdale Capital released its Qualcomm report on the morning of January 23, 2019. The day prior to the release, the stock was trading around $54. A day after the report was released, the stock is now trading at around $51, making for a roughly 5.5 percent loss in the space of two days.