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Technology Stocks : The New Qualcomm - a S&P500 company

QCOM 166.09

+0.6%

3:59 PM EST

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To: idler who wrote (109)	7/24/1999 12:37:00 PM
From: KyrosL	Read Replies (2) of 13582

Here are my opinions on the H&Q report. I am relatively new to Q and mobile comm (I became aware of Q last March), so don't take these too seriously. >>(1) does Motorola really get "priority" with component vendors? Probably yes. It buys in much larger quantities than Q. >>(2) does H&Q have any real basis for asserting that Q will continue to lose share in the handset market? Don't know. But the $1.07billion Q got from its offering could allow it to beef up its manufacturing capability and finance inventory. >>(3) is demand for ASICs really far below supply as H&Q asserts? Don't know. >>(4) is phone production really "excess" resulting in ASP erosion? (when I can't seem to find a Thin-Phone anywhere, at least yet?) Probably not. ASP (Average Selling Price) erosion occurs primarily because of manufacturing efficiencies and vendor competition; in high tech industries it is almost independent of final demand. ASP erosion is not necessarily a bad thing. In fact in markets that experience explosive growth, ASP erosion may be a great thing. For example, the top PC companies thrived under pretty severe ASP erosion. The H&Q analyst evidently is not aware of the concept of demand elasticity. >>(5) what did they mean by saying Q "posted a sequential increase in royalty payments of just 13%" and using that for evidence of ASP erosion in the selling price for ASICs? 13% increase in royalties relative to previous quarter. This projects to 63% increase year to year. I don't understand why the report uses the word "only" to describe this. Since royalties are paid as a fixed percent of revenue and since the number of units increased at a rate greater than 13%, the average price per handset must have dropped. But as I have pointed out, a 63% year over year royalty increase is not low, and ASP price erosion may be a good rather than a bad thing (see 4). >>(6) Is their estimate of "downward pressure on Q's royalty revenues" at all reasonable? No. See answers to 5 and 4 above. >>(7) the 16% estimated long-term EPS growth rate seems way lower than anything else I've ever seen -- is this credible? Probably not. But under worst case conditions it could happen: Globastar goes down the drain, Q fails to improve its handset manufacturing efficiencies, China fails to materialize as a significant market, etc. >>(8) the ultimate valuation -- $82 - $102 range -- looks ridiculously low, based on a multiple of 38 x their FY 2000 estimate of $2.70 per share. In short, is H&G out of its mind or worth taking seriously? It is ridiculously low. But under worst case conditions (see 7) it could happen.

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