Picked this off GTR site. More of the same?
from fortune online
Can Qualcomm Be The Next
Microsoft?
Its stock is on a tear, and fans act as if CEO Irwin
Jacobs is the second coming of Bill Gates. Sure,
Qualcomm's great. It's just not that great.
Julie Creswell
There are those who liken
wireless-equipment maker Qualcomm to
Microsoft or Intel. They say that
Qualcomm's headquarters in San Diego
harbors an intellectual brain trust led by a
visionary genius, CEO Irwin Jacobs. And
they argue that Qualcomm's technological
standard for wireless voice and data
transmission will eventually dominate the
business not only in the U.S. but also
throughout the world.
These true believers have been well
rewarded this year. Since March,
Qualcomm's turbulent stock has surged
from around $35 to its current level of
$190. Wall Street analysts now predict
long-term revenue growth of 35% per
year and have boosted the average
earnings estimate for the year 2000 to
$3.70 per share from $2.58 in April. Can
Qualcomm realistically sustain that kind of
growth? There's definitely more than hype
at work here: Qualcomm is a company
possessed of some unique assets. But
whether comparisons to the software
giant are warranted is another question
entirely.
Long the underdog, Qualcomm and
founder Jacobs, 65, can now claim
vindication from those who pooh-poohed
its CDMA (code-division multiple access)
wireless technology. Ex-professor Jacobs'
bulldog tenacity earned him plenty of
enemies as he battled one different
standard in Europe and yet another that
was adopted earlier in the U.S. by
telecom giant AT&T.
The tide turned in March, when
Qualcomm forged an agreement with its
premier antagonist, Ericsson. The deal
quashed a pending legal battle over
technology patents and cleared the way
for Qualcomm's standard to play an
integral part in the next generation of
wireless networks. Also, Qualcomm sold
Ericsson its money-losing infrastructure
business, a move that immediately
improved profit margins. While these
moves have helped pump up Qualcomm's
stock, sustaining that momentum has to
come from within Qualcomm itself.
Qualcomm's crown jewel is the 199
patents it holds on CDMA technology.
License and royalty fees make up about
7% of its $3.3 billion in revenues, but
they represent essentially pure profit.
The CDMA technology was originally
developed by the government for
top-secret communications because it
was impervious to jamming.
Commercialized by Qualcomm, the
technology tags packets of conversation
with a unique numeric code. Multiple
conversations are carried over the same
frequency; then the packets are sorted
and finally delivered to the appropriate
party.
The agreement with Ericsson will allow
Qualcomm to reap royalty and license
fees for years to come as its standard
moves into other regions, such as Asia.
There are also high hopes that
Qualcomm's standard will be crucial in the
development of the next generation of
wireless networks, which will allow
videoconferencing from cell phones.
Although some argue this new royalty
stream could come as early as next year,
others are less sanguine. Mark Roberts,
an analyst at First Union Capital Markets,
estimates royalty revenues for Qualcomm
will grow to as much as $450 million in
2000, but the next-generation network
"isn't going to have any meaningful
impact on revenues or earnings until 2002
or 2003."
Another big revenue source, Qualcomm's
semiconductor business, has been
compared to Intel's. Qualcomm controls
more than 90% of the market for CDMA
chips and, like Intel, is praised for its
innovativeness and ability to respond
quickly to customer needs. But
competition is lurking. Motorola
announced in August that it plans to
move into CDMA chips (for more on
Motorola, see Investing). Analysts say
Motorola will need time to ramp up
production and note it has a spotty
record when it comes to new-product
development. "We believe Qualcomm, like
Intel, will be able to maintain its distance
between itself and its competitors" for
some time, says Jim Hillary, a portfolio
manager at Marsico Capital Management
in Denver.
If Qualcomm has an Achilles' heel, it's the
handset business. In a partnership with
Sony, Qualcomm was one of the first to
build a CDMA handset and was among the
earliest suppliers to carriers like Sprint.
Now that Sony has stopped making U.S.
handsets, some question whether
Qualcomm can compete in this low-margin
business. Qualcomm held 15% of the
digital handset market at the end of the
first quarter, second only to Nokia's 32%,
according to Dataquest. But giants like
Motorola, Nokia, and most likely Ericsson
are eyeing the CDMA handset market. "If
the right buyer came along, [Qualcomm]
would sell the division," says Edward
Snyder, a wireless-equipment analyst at
Hambrecht & Quist. "It's more of a liability
to the company now than a benefit."
Qualcomm's management says it's "open
minded" about its handset business, and
even CEO Jacobs believes the consumer
electronic kings--Samsung, Sanyo, and
Toshiba--may eventually rule the market.
"We think we need to be very flexible in
our approach to the phone business in
the future," says Tony Thornley,
Qualcomm's CFO.
Does any of this add up to the next Intel
or Microsoft, or make Jacobs an elderly
Bill Gates? It's a stretch. Qualcomm has
high profit margins and fanatics love its
stock, but it could learn a couple of
things from Microsoft about handling the
competition. On second thought, who
really wants to be Microsoft these days
anyway?
Vol. 140, No. 6 |
