Lehman analysis from last week....indicates MOT may incorporate some of Q's chipsets in their domestic phone offerings (currently the Q's ASIC's only go into phones for the Korean and Brazilian markets).
lehman.com
Headline: QUALCOMM Inc: MOT Comments on CDMA Chips Overdone, Reiterate 1 Buy
Author: Tim Luke, Mark Sue (212)526-4993
Rating: 1
Company: QCOM
Country: COM CUS
Industry: TELECM
Ticker : QCOM Rank(Old): 1-Buy Rank(New): 1-Buy
Price : $152 1/2 52wk Range: $167-19 Price Target (Old):$200
Today's Date : 08/04/99 Price Target (New):$200
Fiscal Year : SEP
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EPS 1998 1999 2000 2001
QTR. Actual Old New Old New Old New
1st: 0.29A 0.33A 0.33A - -E - -E - -E - -E
2nd: 0.13A 0.41A 0.41A - -E - -E - -E - -E
3rd: 0.17A 0.75A 0.75A - -E - -E - -E - -E
4th: 0.27A 0.88E 0.88E - -E - -E - -E - -E
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Year:$ 0.85A $ 2.37E $ 2.37E $ 3.80E $ 3.80E $ 3.70E $ 3.70E
Street Est.: $ 2.05E $ 2.06 $ 2.77E $ 2.79 $ 4.78E $ 4.80
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Price (As of 8/2): $152 1/2 Revenue (1999): 3.6 Bil.
Return On Equity (99): N/A Proj. 5yr EPS Grth: 35.0 %
Shares Outstanding: 148.0 Mil. Dividend Yield: N/A
Mkt Capitalization: 22.57 Bil. P/E 1999; 2000 : 64.3 X; 40.1 X
Current Book Value: $19.42 /sh Convertible: YES
Debt-to-Capital: 0.1 % Disclosure(s): C, A
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* Yesterday, shares of QCOM came under pressure following comments by MOT
management during the Q&A session of its annual analyst meeting that they
plan to be more aggressive in selling CDMA chipsets to third parties. Based
on our confidence in the strong growth outlook for QCOM's chipset unit we are
reiterating our 1 Buy rating on QCOM and we would use the weakness as a
buying opportunity.
* While MOT, like Lucent, has limited rights to sell CDMA chips to third
party handset vendors (together with full chipset licensees VLSI and DSP),
the company has struggled to produce platforms that are able to compete with
QCOM's advanced ASICs. We note that MOT has been hoping to expand its
presence in CDMA chipsets for some time and made similar comments in meetings
last year.
* In fact, offline MOT management confirmed it would be challenging to
persuade handset vendors who have already designed in QCOM's chipsets into
their current platforms to change suppliers. In our view, MOT may be
unlikely to penetrate accounts until new platforms such as IS-95C based
phones are released in 2H00.
* In the near term, MOT management confirmed offline that its Personal
Communications Sector (handset division) may actually expand its use of
QCOM's chipsets. Semiconductor chief Hector Luiz suggested that in addition
to using QCOM's ASICs in phones sold in Korea and Brazil, MOT may now begin
using QCOM's chip for some models sold into the U.S.
* With QCOM's current 4Q99 tracking very well and visibility on FY00
improving we continue to view our estimates as conservative. We believe
chipset shipments to Ericsson beginning as early as 1Q00 could provide
significant further upside to our estimates for FY00. Reiterate 1 Buy.
Price target $200 or 40x FY01 of $5.00.
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During its annual analyst meeting yesterday, Motorola management suggested
that they will further pursue opportunities in the rapidly accelerating CDMA
market. While expanding its profile in the CDMA chipset market did not
feature in management's formal presentation, Motorola in reply to questions
during the Q&A session for the Semi unit stated that it is likely to target
the merchant market place as it improves on its current generation of CDMA
chipsets. Motorola currently uses chipsets from QCOM in its handsets sold to
the Korean and Brazilian markets while its internally developed designs are
used in the company's high end U.S. offerings.
In our subsequent offline discussions with management however, we have
learned that due to the importance of time to market and the technical
challenges involved in providing high performance low cost chipsets, that it
is unlikely that vendors including Motorola will change chipsets for their
current digital handset offerings. Furthermore, Motorola stated that it may
even use QCOM's chipsets in some of its U.S. offerings over the next several
months.
Motorola currently has a license agreement from QCOM to manufacture and sell
chipsets to other vendors and the current terms of their agreement prevents
Motorola from bundling silicon with the necessary software codes developed by
QCOM to provide a total solution. In essence, this "limited license"
requires MOT to internally develop its own instruction set for their chipsets
and any work around the stated limitations may lead to significant delays in
coming to market, we believe.
While QCOM remains the current leader in CDMA chipsets, other vendors have
been granted full licenses to sell chip sets to third parties including VSLI
and DSP Communications. Considering the increase in competition, we have
already modeled QCOM's market share for merchant chipsets to decline from
current levels of more than 90% to approximately 60% over the next 24 months.
However, we note that the rapid acceleration of the CDMA market combined with
QCOM's 12-18 month technological lead is likely to ensure that QCOM remains
the key beneficiary of the growth in CDMA wireless subscribers.
Additionally, as CDMA continues to grow at its torrid pace, license fees and
royalties are further likely to aid QCOM's growth.
Stock Opinion: Reiterate Buy
We remain encouraged by the strong growth prospects for both Qualcomm and the
global CDMA market. We believe the current strong CDMA growth and continued
wireless buildouts is a testament to the benefits of CDMA technology. In the
US, we believe the highly successful one-rate plans offered by many major
carriers such as Sprint are likely to continue to drive rapid CDMA subscriber
growth. Overseas, the removal of uncertainty of standards should help
several large new markets such as Japan, Brazil, India and China gain
momentum in 1999. We also believe Qualcomm will benefit from increased
royalty revenues as the existing CDMA market expands and as a converged
global third generation wireless standard based on CDMA begins to be
deployed. Separately, QCOM will host its annual analyst meeting in NY on
September 15, 1999.
We continue to view QUALCOMM as a highly attractive investment vehicle in the
wireless equipment sector. Our 1 Buy rating and our twelve month price
target of $200 is based on Qualcomm achieving a multiple of around 40x our
new high end calendar 2001 estimate of $5.00
BUSINESS DESCRIPTION: QUALCOMM provides advanced communications systems &
products based on digital wireless technology. These include the OmniTRACS
sys. & digital wireless telephone sys. based on CDMA technology.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities.
This document is for information purposes only. We do not represent that this
information is complete or accurate. All opinions are subject to change. The
securities mentioned may not be eligible for sale in some states or
countries. This document has been prepared by Lehman Brothers Inc., Members
SIPC, on behalf of Lehman Brothers International (Europe), which is regulated
by the SFA. ] |
