Wednesday, January 9, 2019

Will analysts stop buying Qualcomm's representations of leverage over Apple after Tim Cook's CNBC interview?

Day Three of the FTC v. Qualcomm antitrust trial was underway in San Jose (a couple of blog posts about it will follow later) when I saw a CNBC interview--Jim "Mad Money" Cramer went to California to interview Apple CEO Tim Cook--going viral. You can find the video and the complete transcript on this CNBC webpage.

With this unique style and format, Cramer made financial analysis on TV more entertaining than anybody before him. He's to Wall Street what Rush Limbaugh is to Washington politics: aggressive, outspoken, and unconventional, but none of that should discredit anyone's analysis. A hedge fund manager with decades of merger arbitrage experience called me a couple of days after IBM announced its plans to acquire Red Hat, and the first thing he said was: "Believe it or not, Florian, I watched Mad Money with Cramer last night." He was laughing, but it's a fact that even the pros pay attention to Cramer--from time to time at least.

Tim Cook explained to Jim Cramer why he believes in Apple's present and in its future, and about 17 minutes into the interview, Mr. Cramer referred to AAPL "naysayers" and said Qualcomm was telling him all the time that Apple would now have to settle the dispute with the chipmaker because of the decisions Qualcomm obtained in China and Germany. But Mr. Cook said no settlement discussions with Qualcomm had taken place since the third calendar quarter of last year, meaning that Qualcomm's symbolical victories in Germany and China simply failed to bring Apple back to the negotiating table, much less did they make Apple cave.

I know those stories about what Qualcomm tells Wall Street because I hear them from analysts all the time (and then I discuss with them how I view the state of affairs). As I recently wrote, telling investors that a settlement with Apple is near appears to be Qualcomm's #1 investor relations objective these days. Or I should say it appears to have been Qualcomm's #1 IR objective. At this point, all that Qualcomm will "accomplish" by reiterating the same fairy tales is further damage to its credibility with investors and analysts.

They weren't even consistent last year. In the summer I heard from an analyst that Qualcomm didn't have great expectations regarding its lawsuits in Munich, but thought it had an opportunity to win a case in Mannheim that would give it leverage and force Apple to settle. Then came a couple more Mannheim trials in September and October, and the way they went it can be ruled out that Qualcomm would get serious leverage there. In one of those cases the court even suggested that Qualcomm stipulate to a stay because the patent-in-suit appeared too weak.

Then, all of a sudden, Qualcomm started claiming that Munich was going to be the venue that would decide the dispute. But three weeks (minus one day) after that particular decision came down, the iPhone 7 and the iPhone 8 are still widely available in the country as I demonstrated earlier this week.

If I were a Qualcomm shareholder, I would take issue not only with the way Qualcomm communicates with me, but also with the absurdity of posting bonds over $1.5 billion (that must cost Qualcomm tens of millions of dollars per year) when there's hardly any impact other than making noise in the media and misleading Wall Street to think that Qualcomm has serious leverage, which quite apparently it does not.

For an update on the Munich situation, I emailed and called the appeals court (Oberlandesgericht M√ľnchen = Munich Higher Regional Court) and was told that Apple indeed appealed the pair of injunctions Qualcomm obtained and brought, as expected, a motion to stay their enforcement for the duration of the appeal. Qualcomm was ordered to respond to the motion, and the unspecified deadline for that response hasn't passed yet.

In that CNBC interview, Mr. Cook said it sould be beneath any company to do some of what Qualcomm is doing. When Mr. Cramer asked whether this referred to Qualcomm's representation of a settlement being in sight, Apple's CEO said it was part of it, but particularly stressed fake news planted by PR agencies on Qualcomm's behalf. While this wasn't mentioned, the fake "Draft Tim Cook 2020" campaign may be part of it.

I still think Qualcomm is a highly innovative and impressive company, but its credibility has suffered a lot in those two years since the FTC and, separately, Apple sued Qualcomm. The "house on fire" story is another example. It's the opposite of those settlement and leverage stories in terms of overstating the risks, but it's consistent in its untruthfulness.

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