iStock

Qualcomm Inc. (QCOM - Get Report) shares fell after hedge fund Kerrisdale Capital announced just before the open that it was short Qualcomm, arguing that the $63 billion chip maker is "teetering on the brink of disaster."

The stock fell 4.6% to $51.77 a share at the close of trading on Wednesday afternoon. 

Hedge fund Kerrisdale Capital announced just before the open that it was short Qualcomm, arguing that the $63 billion chip maker is "teetering on the brink of disaster." 

Qualcomm is down 28% in the past five years, but hit a three year high of $75 in September. Its stock took a blow in early November after a judge issued a preliminary ruling in favor of the Federal Trade Commission's position that Qualcomm should license its chips to competitors. The case is being tried now with closing arguments scheduled for Feb. 1. 

Kerrisdale argues that Qualcomm will lose the case, causing its stock to fall further. He gave it a price target of $21, representing 60% downside. 

"The FTC has brought a powerful legal case against the company, and the trial [conducted entirely before a judge, not a jury] is currently underway," the note said. "We believe Qualcomm will lose." 

If Qualcomm loses, it would have to license its chips to semiconductor competitors such as Intel Corp. (INTC - Get Report) . Much of Qualcomm's revenue and profits come from royalties it's able to charge buyers such as Apple Inc. (AAPL - Get Report) and Samsung (SSNLF) for its premium chips.

Kerrisdale's note quoted a 2015 comment made by an internal Qualcomm assessment saying that "granting a FRAND [fair, reasonable, and non-discriminatory] license to Intel 'would destroy the whole current QTL [licensing] business." 

"If Qualcomm is right about that," Kerrisdale said, "then destruction is imminent." Much of Kerrisdale's belief that Qualcomm will lose hinges on the fact that FRAND rules say that players are obligated to license its technology to competitors. As a result, the hedge fund believes could cut Qualcomm's licensing revenue and earnings power, and thus its stock price, in half.

The fund also mentioned Qualcomm's "broader business is poor," as several chip competitors have cropped up. The company's revenue and earnings growth have been volatile in the last year or so. 

Apple is a holding in Jim Cramer's Action Alerts PLUS member club . Want to be alerted before Jim Cramer buys or sells AAPL? Learn more now.