msdw on Nok and Q
Qualcomm (QCOM-$60-SB-V) Notes from NOK Meeting Louis Gerhardy
We reiterate our Strong Buy-V rating on QCOM. Nokia (NOK-$24-N, covered by A.
Dean/M. Nash) sees some of the best growth for the wireless industry in 2002 from the
Americas and Asia, the 2 principal markets for CDMA today. NOK announced at their
analyst meeting yesterday they expect the global handset market to grow 11-16% Y/Y
(from 380MM to 420-440MM units) in 2002. With the favorable regional outlook for
CDMA, we remain comfortable with our estimate of 23% growth for the CDMA handset
market in 2002.
The time-to-market of CDMA2000 vs. WCDMA remains significant, in our view.
Evidence suggests the initial WCDMA handsets introduced by NOK in 2002/2003 will
support data rates of 64Kbps or 128Kbps, well below the 384Kbps that was originally
expected and previously considered in Europe as the minimum cut-off for 3G. In
comparison, several million CDMA2000 1x handsets are in use today supporting data rates
of 153Kbps and soon (Rev. A) 307Kbps.
The first phase of our investment thesis on QCOM is not dependent on the successful and
on-time launch of WCDMA. In fact, network sharing proposals, the cost and lack of
WCDMA spectrum, the re-emergence of EDGE, reduced data rates, the complexity of
the handsets, and uncertainty about some carriers balance sheets are issues that cause us
to be very cautious about the state of WCDMA. Highlighting the uncertainty, NOK
conservatively does not intend to recognize revenue from WCDMA basestations until mid
2002, even though NOK has been shipping hardware since Sept 2001. Our 2002 estimates
on QCOM do not incorporate a meaningful contribution from the WCDMA market.
We believe the 3G economies of scale (we estimate 75% of the market is currently
aligned for WCDMA and 25% CDMA2000) argument in favor of WCDMA may not be
as significant as currently expected. The different modes and frequencies required to
support backward compatibility in each region would be enough to fragment the market, in
our opinion. In addition, the cost of purchasing new spectrum for WCDMA (not required
for CDMA2000 introduction) is usually not considered in the calculations.
Nokia (NOK1V.HE-€27-N) A Muted Performance Angela Dean/Marcus Nash
Nokia Capital Markets Day seemed less upbeat this year. 2002 revenue guidance was
in-line with our current forecasts; C4Q01 industry units were slightly reduced; There were
no comments on 2003.
We continue to feel Phone ASP and Network margin targets are tough. NOK's guidance
for Phones' ASPs is flat in 2002 and rising in 2003; Mid teens Networks margins in C2H02
still looks challenging to us.
Some appealing aspects, but valuation is challenging - Our new fair value is €16. To
construct a buy case we would need CAGR 01-06 of over 20%.
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