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Qualcomm: Large R&D Cuts Could Be Disastrous

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Business Quant


  • Qualcomm has spent about $37.9 billion on research and development over the past 10 years.
  • Significantly slashing its R&D spending may boost its profitability over the short-term period, but it could hamper its sales growth over the longer run.
  • I believe that significant R&D cuts aren't in the best interest of Qualcomm's shareholders.

Shares of Qualcomm (NASDAQ: QCOM) have stayed distressed over the past few months. The chipmaker has been mired in legal controversies of late and the absence of any new products that would make up for its ongoing revenue slump has created an overhang on its shares. Fellow contributor Bram de Haas hypothesized in his recent article that Qualcomm could make up for its shrinking profits by slashing its R&D budget. While I appreciate Mr. Bram’s work, I disagree with his conclusion. I strongly believe that drastic cuts in R&D spend could potentially do more harm than good, for both Qualcomm and its shareholders.

Maintaining Lead

Let me start by saying that Qualcomm holds more than 26,600 patents as of now and owns a lot of mission-critical wireless IP that hundreds of OEMs have grown to use. The majority of its vast patent portfolio wasn’t built over a period of one or two years but rather over the past decade. In addition to having a top-notch management and a quality think tank, it’s Qualcomm’s audacious R&D investments of $37.9 billion, spent over the past ten years, that have made the chipmaker an indispensable name in the wireless networking field.

(Source: Company Filings, Compiled by Author)

If we took away a major chunk of its R&D spend that happened over the past few years, Qualcomm probably wouldn’t have been in the leading position (such as baseband and mobile application processor segments) that it currently enjoys. For starters, it wouldn’t have amassed its vast patent portfolio. Just to have a better understanding of its prowess in the field, Qualcomm commanded 50% of the mobile baseband market last year while its closest competitor, MediaTek, didn’t even have half of that. Slowing down on R&D spending would simply allow its rivals to close in on Qualcomm’s technological lead.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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