The difference between intrinsic value and today's quoted stock price is what we are most interested in.
Gregg, I am new here (others are too due to the recent runup). So that all of us are in sync, please take a moment and help us with the big picture (before I get lost in the details).
Framing the big picture in our mind ...
This is a very interesting business due to its three streams of revenues: handsets, ASICs, and royalties. Its technology (CDMA) and history (Holy War) is also very interesting.
The size of the market. At the end of 1998 there were approx 25 million CDMA users and 162 million GSM users (6x as many!), over time (3G, 4G, whatever) all wireless handsets will contain CDMA in it; over time, 5-15 years out, we could have 1-2 billion users. Add this picture to the yet unknown Internet (data) applications .... we have a sense of size.
First, the IPR (CDMA patents and know-how) of the company is most important. How solid is this position? Pretty solid we think (hope).
Forgetting about the complex business model for a moment, at the end of the day QCOM could realize an *after tax profit* of a few dollars ($10?) for *every* handset sold eventually. A toll booth somewhat like MS's Windows (we hope).
About ASICs. Couple weeks ago Dr. Jacobs (CEO) said "Yes, CDMA is complicated". That is good right? That means CDMA ASICs are hard to design and manufacture. Since QCOM has the know-how, they should continue to enjoy a lead here (the technology has a ways to go in advancement). So, the ASIC business has been, and should continue to be, a very good business. Perhaps somewhat Intel-like (we hope).
About handsets (currently 50% of revenues). QCOM doesn't have the scale of a Nokia or a Motorola, but it's no longer small either, and will be getting bigger in scale in time. Wireless devices will undergo a lot of advancements in the next few years. QCOM have decided to stay in this business and will be addressing the high-end of this space (e.g. pdQ and JV w/ MSFT, etc) There is some risk here because over time this space will experience supply & demand issues (especially at the low-end) and profits (losses) will be choppy. This is the tail (handset) that will wag the dog (ASIC, royalty, hence stock) from time to time. For investors, it will be lots of gut checking, homework, and opportunity. As long-term investors of a good business, volatility is our friend.
Back to IPR, royalties, and the whole business. How do we get our hands around this thing *assuming* QCOM's IPR & CDMA-know-how can hold *forever*? A model of perhaps US$10 (or 3-5% of each device) of profit from every wireless phone sold (via handset or ASIC or royalty) in the long-run? (Maurice suggested $20 per year) This leads us to an estimate for intrinsic value.
Finally, and a very important point, management is good.
How does your big-picture view of this investment differ? Please critique. |
