Ramsey:
I presume your comment regarding Qualcomm's 'full valuation' is an attempt to provoke debate rather than a carefully researched conclusion?!
I, for one, have been struggling to bound the economic opportunity, particularly given some of the unknowables. But, the stock does not appear richly valued based on tangible, near-term fundamentals. Consider that the company earned $0.86 (pro forma) during the June quarter. Bake into the equation that handset production was component constrained for both Qualcomm and its licensees. As a result, handset revenue was lower than would have otherwise been possible, handset margins were lower than otherwise possible (due to reduced overhead absorption etc), royalties were less than possible (since licensees couldn't build/ship as much product as demand called for) and ASIC volumes were also lower than possible (for the same reason). It would thusly appear that the business model will therefore support substantial additional margin (and earnings) leverage.
This operating leverage will be applied to rapidly expanding revenues. For example, excluding infrastructure operations, ASICs, handsets and royalties grew in excess of 25% year-over-year despite the aforementioned production constraints. And even this metric is deceptively low, because the Sony share of QC revenues declined significantly year-over-year; so 100% QC revenue increased by some larger, but currently incalculable, percentage.
Put this all together, and one is not hard-pressed to see earnings power in excess of $4.00 share during calendar 2000. Such a performance would leave Qualcomm, perhaps THE preeminent investment in wireless IPR, trading at only a modest premium to the market multiple. As such, methinks you are being pretty conservative with your valuation assumptions just based on what is visible right now.
How about possibilities that are not currently visible? Ericsson, the world's second largest cellphone company, will shortly introduce an (IS-95) CDMA phone based on the Qualcomm chipset. Presumably, given its recent acquisition, Ericsson also intends to sell CDMA infrastructure. The latter observation makes me ponder what I call the "power of incumbency". Wireless operators are loathe to switch from their prime contractor; this reticence helped keep Motorola in the CDMA business for three long years while the company struggled to stabilize its hardware. The same reticence suggests to me that Ericsson will be hard pressed to displace existing CDMA network vendors from their current customers. So, to whom does Ericsson expect to sell CDMA infrastructure? Well, there are a number of GSM/TDMA centric Ericsson customers in the US and worldwide that might just consider a trial network or two or three or.... Have you considered this possibility and its economic implications?
Do you understand that TDMA-based GSM (and IS-136) face an extraordinarily cumbersome and expense migration path to high speed data? Do you know that GPRS will require essentially a complete network overbuild in order to achieve 114kps? Do you understand that EDGE will subsequently require new handsets, on top of this new infrastructure, to push data rates only to 384kps+. Do you understand that Phase I of cdma2000 will yield 144kps data rates, double the voice capacity of existing IS-95 networks, and BE BACKWARD COMPATIBLE with existing handsets in the field? Do you understand the deployment advantages, and flexibility, of cdma2000's 1.25mhz design? Do you understand that operators with 5mhz of spectrum can mix and match voice channels and high speed data? Do you understand that Phase I can be deployed as a field upgrade without replacing existing infrastructure? Do you understand the tremendous economic advantage that this confers to IS-based, CDMA-centric, operators? The capital investment and performance deltas between TDMA and CDMA are shifting even more dramatically in the latter's favor. Meanwhile, Phase II of cdma2000 pretty much puts the nail in tdma's coffin longer-term.
So what will the wireless world look like in two or three years? Will wireless internet appliances, prototyped by QC's pdQ, become ubiquitous? How rapidly will wireless data become part of our every life, ala the Internet? Will the capacity gains afforded by 1XRTT begin to enable mobile wireless networks to compete head to head with landline? I could prattle on and on, but the point is, telecom is perhaps one of the world's most dynamic industries. Wireless telecom is the most rapidly growing subset of telecom. And, Qualcomm is positioned as the technological locus of both 2G and 3G wireless...and you think that Qualcomm should be valued like the run-of-the-mill large capitalization equity?
Within the context of the above, I am sure that many people thought Microsoft was fully valued, based on its high PE multiple, back in 1986. If the personal computer had remained a toy rather than evolving into a critical business productivity tool, such a conclusion might have been warranted. It took tremendous vision to understand that Microsoft's software was an enabling technology that would allow PC's to become mainstream business tools. I would be disappointed if you fail to perceive that parallelism as it relates to CDMA and wireless telephony.
All the best,
Gregg |
