Qualcomm (QCOM), a leading semiconductor company, came under pressure on October 23 after Bloomberg reported that its long-term partner, Arm Holdings (ARM), was scrapping the license agreement between the two companies. I believe it’s time to be cautious about Qualcomm stock as this decision may adversely impact the company’s relationships with its main customers, potentially leading to a loss of revenue.
Although Qualcomm enjoys a long runway to grow, aided by favorable long-term trends in the chip market, I am neutral on the prospects for the company given the lack of clarity surrounding the impact of Arm’s decision.
Although I believe Qualcomm is well-positioned to benefit from a recovery in the global semiconductor market, I am wary of the risks posed by Arm’s license deal cancellation. According to Bloomberg, Arm Holdings has given Qualcomm a 60-day notice of cancellation of the license deal that allowed the chipmaker to use Arm’s IP to design and develop chips.
If the two companies fail to strike a new deal, Qualcomm would lose access to Arm’s instruction set architecture which is used to create custom CPU cores. Qualcomm uses Arm’s architectural infrastructure in designing chips for Android smartphones, which is the biggest contributor to company revenue.
In addition, Qualcomm may have to redesign recently-introduced Nuvia-based chip designs, leading to a notable rise in development costs. This, in turn, will impact Qualcomm’s operating margins. Qualcomm may also have to materially change its product development pipeline, affecting the company’s product roadmap. Significant delays should be expected for new product launches, and these delays are likely to hurt the company’s brand image as a reliable chipmaker that delivers on time.
In addition to the direct impact resulting from the cancellation of Arm’s license deal, I am worried about the choices Qualcomm is left with in a post-Arm era. One option would be to consider alternative chip design architectures such as RISC-V. The problem with this strategy is that shifting to a new architecture will cost the company millions of dollars.
Such a transition will also give rise to operating inefficiencies in the first few years, making it difficult for Qualcomm to keep its major clients satisfied. Qualcomm may also consider developing a new architecture in-house to mitigate the threat posed by Arm’s license deal cancellation, but the company would have to incur substantial costs to build a new platform.