Arm’s License Cancellation Is a Negotiating Tactic Against Qualcomm

Shares of Qualcomm QCOM, a holding in the TheStreet Pro Portfolio, are trading off following reports that Arm Holdings ARM has canceled an architectural agreement that allows Qualcomm to use intellectual property to design its chips. This escalates the existing legal dispute between the two companies that will head to trial in December. That dispute centers on Arm’s claim Qualcomm breached a contract agreement following Qualcomm’s 2021 acquisition of chip design company Nuvia and a failure, per ARM, to renegotiate contract terms. Qualcomm’s position is its existing agreement with Arm covers Nuvia.

The thing is Nuvia’s work and the continued work as a part of Qualcomm is central to new chips being sold by Qualcomm into the PC industry as part of its AI PC efforts. Tuesday night Qualcomm announced it will incorporate Nuvia’s work into its Snapdragon chips for smartphones, shoring up its competitive position as AI bleeds into that market as well.

New Licensing Arrangement Is Likely Outcome

While Qualcomm’s move into PCs makes it a competitor with Arm, our thinking is this is a battle that is likely to be settled by a new economic arrangement between the two companies. With Qualcomm being a “major customer” of Arm, accounting for 10% of revenue, odds are Arm will be motivated to not lose it as a customer.

We also doubt Qualcomm wants to jeopardize its AI PC opportunity with its 20 partners, including Microsoft MSFT. That means we could see a new negotiated license, granting Qualcomm rights to customize Arm architecture, but at a higher royalty rate than Nuvia had been paying.

While that is a potential outcome, we should point out that Qualcomm is no piker when it comes to legal battles, especially given its own licensing business. Qualcomm bested Apple AAPL in 2019 and won a court decision on appeal against the U.S. Federal Trade Commission.

Even if the two companies ultimately head to trial, the possibility of a deal remains, which means we will have to monitor developments closely. That means parsing their September-quarter earnings call comments, even though they are likely to be minimal.

Qualcomm Shares Likely Rangebound Until a Resolution

Despite the improving smartphone market and AI PC opportunity, this latest development is likely to bring a larger cloud of uncertainty over Qualcomm’s shares that won’t be lifted until we know the outcome. Odds are this means the shares will be rangebound despite the favorable data points likely to be had in the next few weeks.

So long as both companies focus on the larger market opportunities afforded by a renewed working relationship, the medium to longer-term opportunities for Qualcomm remain intact.

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At the time of publication, TheStreet Pro Portfolio was long QCOM, MSFT and AAPL.