Qualcomm (QCOM), a leading semiconductor company, came under pressure on October 23 Bloomberg reported that its long-term partner, Arm Holdings (ARM), was scrapping the licensing agreement between the two companies. I think it’s time to be cautious with Qualcomm stock, as this decision could negatively impact the company’s relationships with its key customers, potentially leading to revenue losses.
While Qualcomm has a long way to grow, aided by favorable long-term trends in the chip market, I’m neutral on the prospects for the company given the lack of clarity on the impact of Arm’s decision.
While I believe Qualcomm is well positioned to benefit from a recovery in the global semiconductor market, I am wary of the risks arising from the cancellation of Arm’s licensing agreement. According to BloombergArm Holdings has given Qualcomm a 60-day notice of termination of the licensing agreement that allowed the chipmaker to use Arm’s intellectual property to design and develop chips.
If the two companies fail to reach a new deal, Qualcomm will lose access to Arm’s instruction set architecture, which is used to create custom CPU cores. Qualcomm uses Arm’s architectural infrastructure to design chips for Android smartphones, which are the largest contributors to the company’s revenue.
Additionally, Qualcomm may have to redesign the recently introduced Nuvia-based chip designs, which will lead to a significant increase in development costs. This, in turn, will impact Qualcomm’s operating margins. Qualcomm may also have to substantially change its product development pipeline, which will impact the company’s product roadmap. Significant delays in new product launches should be expected, and these delays are likely to damage the company’s brand image as a reliable chipmaker that delivers on time.
In addition to the immediate impact resulting from the cancellation of Arm’s licensing agreement, I worry about the choices Qualcomm will have 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 switching to a new architecture will cost the company millions of dollars.
Such a transition will also create operational inefficiencies in the first few years, making it difficult for Qualcomm to keep its major customers satisfied. Qualcomm could also consider developing a new architecture internally to mitigate the threat of canceling Arm’s licensing deal, but the company would incur significant costs to build a new platform.
