QCOM: What is Merrill Lynch Thinking?

Implications: Merrill Lynch downgraded its rating on QCOM today, citing yesterday's loss at the ITC as a "major negative" and lamenting that now QCOM is unlikely to be able to settle the broader NOK fight anytime soon.  That analysis is hard to fathom.  Yesterday's news was a setback to be sure, but for it to be a "major negative" someone would have had to have expected that a win was actually going to be of economic consequence and/or lead to sooner settlement.  Those theses both seem far off base.

Analysis: Merrill Lynch is stealing headlines today with its decision to downgrade QCOM from BUY to NEUTRAL.  The public reports tell us that Merrill viewed yesterday's loss as a "major negative" and significantly changes ML's outlook for the stock.

I must admit to being deeply skeptical.  For the news yesterday to have been a major negative, the relevant analyst would have had to been thinking that the case was economically significant and/or that a win for QCOM would accelerate the timetable to a broad NOK/QCOM settlement.  Those expectations seem way off base to me.  This case was small dollars all along, and there is no way that a win here was going to drive settlement of the WCDMA/CDMA fight.  In short, I don't understand how ML could be disappointed, because they shouldn't rationally have had particularly high expectations to begin with.

In detail:

1. Could ML have been expected a win yesterday to significantly move the economics of either QCOM or NOK?  No way.  Even if QCOM had won yesterday, the only cash in play was the value of NOK's business of importing GSM phones into the US.  Reasonable minds can disagree over how big that number is, but it is a small number relative to the amount of money at stake in the bigger CDMA/WCDMA fight.  Moreover, a win yesterday would have only been a first step toward leverage of any sort, because a win would have been followed by the mandatory appeal to the full ITC (see you in April) plus a likely supplemental fight over whether QCOM was even allowed to ask for an exclusion order given things like RAND, waiver, and other legal obligations plausibly associated with QCOM's participation in the relevant standard-setting process.

2. Could ML have been thinking that a win yesterday would accelerate across-the-board settlement of the NOK/QCOM litigations?  Again, no way.  The amount of money at stake in the CDMA/WCDMA fight dwarfs the cash at stake in yesterday's ITC fight.  Moreover, the CDMA/WCDMA fight is almost impossible to settle now that the EC is looking at that issue.  After all, any deal the parties strike could very easily be functionally overturned whenever the EC rules.  Besides, QCOM isn't going to cut a deal today and, through that, lend credence to the charge that QCOM's originally-offered prices were not reasonable.

Put bluntly, for yesterday's news to have been a "major negative," observers would have had to have been expecting the opposite news and thinking that the opposite news would really matter.  I'm not sure what people were expecting in terms of outcome (I posted my own thoughts yesterday), but it does not seem reasonable for anyone to think that either outcome was going to significantly alter QCOM's future.  Yesterday's news was another small ripple in a much much larger pond. 

I hope ML chooses to say more on all this, and publicly.  Because, so far, the analysis they put out does not resonate, and seems a big change in perspective based on a very small actual change in circumstance.