Here is a rather poorly written article. Remember George Schmitt was fired from Primco, he did not want cdma, the board did, george went.
Link
smartmoney.com
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September 17, 1999
Why Are So Many Shorts Betting Against
Qualcomm?
By Alec Appelbaum
YOU CAN BELIEVE in a company as deeply as you believe
in mom and apple pie. But when you buy stock in that
company, you're betting rather than buying certain results.
And when there are a lot of people betting against you,
dramatic things can happen to your stock. Qualcomm
(QCOM), Wall Street's wireless-hardware darling, has
returned over 214% this year. But more than 10% of its
shares are under the thumb of short sellers -- investors who
have promised to sell shares they don't own, expecting a
drop in price. And after a week in which Qualcomm
announced plans to sell one of its major businesses, the
shorts are casting some pretty big shadows.
For today's screen, we're concerned with more than whether
Qualcomm makes a good long-term investment in wireless
communications. We also want to know whether its stock is
a candidate for a short squeeze. Remember, shorts have
agreed to sell stock they don't own. In a short squeeze, they
have to cover that position quickly after sudden good news,
buying stock before it rockets out of their price range. Their
buying tends to send the stock even higher. The question is
not, are the shorts right or wrong? The question is, are they going to stop betting against the stock? In
Qualcomm's case, the answer would appear to be no.
In today's screen (see recipe), we found companies with more than 10% of their market cap shorted, a
recent increase in short interest and high expectations for earnings growth in the next couple of
quarters. Qualcomm meets all those requirements, and it's vulnerable to what one analyst, speaking off
the record, calls the curse of fast-growing stocks: "Any tech stock that makes a strong move, people
who are negative about market sentiment will short it, hoping it rolls over." But Qualcomm is not just any
stock.
Qualcomm's most important business consists of patents for a certain kind of advanced chip that allows
lots of wireless traffic to run across lots of radio spectrum. Soon, that will basically be its only business
-- the company sold its infrastructure operations in a patent-dispute settlement with Ericsson (ERICY)
earlier this spring, and CEO Irwin Jacobs told analysts and reporters this week that it now plans to sell
its phone-manufacturing business by the end of the year. Margins in infrastructure and phones hadn't
been growing as fast as margins from royalties and service fees, and Qualcomm can little afford to
disappoint analysts who've come to expect intense earnings growth. (The stock tanked on Tuesday
when an analyst suggested that it might not beat growth expectations this quarter.) So, adios to those
pesky heavy-equipment businesses.
There are two ways of viewing this move. Analysts seem to view it as a
license to print money, pointing out that Qualcomm will get a royalty on
every phone that uses its chip design -- a design they say is the best for
sending data over wireless phones. Dale Pfau of CIBC Oppenheimer
raised his share-price target on Qualcomm to $250 this week for what he
calls a "pretty simple" reason: The company is now essentially a chip
manufacturer without any factories, making the potential profits on each
of its sales extraordinarily high. Of course, revenue will grow more slowly
because Qualcomm will have fewer businesses, but Pfau doesn't care.
"Profit is what you pay for in a wireless-hardware stock," he says.
Others view Qualcomm's approach as potentially suicidal. George
Schmitt, a veteran executive with wireless operator Omnipoint (OMPT), says the approach makes
Qualcomm too vulnerable to schemers who want to get around its patents and to short sellers who
expect them to succeed. "If their whole revenue comes from a royalty stream, and that disappears, then
they are nothing," says Schmitt. Sure, they have the leading technology now, but markets change, and
Qualcomm must hope that its patent and chip-design strength last. "That's not a company with a 200
multiple," says Schmitt.
For both Schmitt and Pfau, the real question will be Qualcomm's role when "3G" -- the next generation
of wireless-data service -- becomes widely available on phones and other devices. Pfau, like many of his
colleagues, argues that the future, however long it takes to arrive, will "converge to some kind of"
endorsement of Qualcomm's standard. Schmitt argues that the things people will want to do with their
wireless devices -- get and send email, do a little shopping, perhaps check a map -- won't require for
several years the kind of bandwidth that Qualcomm can harness. Now, Schmitt has a reason to think
this way -- he helped build his company around a different standard. But he may have a point. Dataquest
analyst Naqi Jaffrey says the speeds available from rival standards will be "good enough" to satisfy
customer demand through next year. After that, says Jaffrey, it's not at all clear whether demand will
emerge for, say, videoconferencing from your car -- the sort of thing Qualcomm's standard will allow.
Even if you accept that Qualcomm owns the future, Schmitt argues, you need a firm understanding of
how the future will change in order to ignore the short sellers. If he's right and the market doesn't
demand souped-up wireless data for two years or more, that theoretically leaves plenty of time for
Lucent Technologies (LU) and Motorola (MOT) to send their smartest engineers out to design chips
that can go around Qualcomm's patents. "None of us know" what new engineering will occur in the
interim, insists Schmitt.
Indeed, rivals line up every day. A new chip from Analog Devices (ADI), for example, will allow phones
to work without recharging for 1,000 hours -- and could, if it's produced and marketed properly, defer the
Qualcomm future to some degree.
Despite the short interest, Qualcomm remains something of an armor-plated stock. Its technology is
certainly strong, and Mark Roberts of Everen Securities says its stock price reflects robust demand for
its current generation of equipment. The stock rose 17% this week, after the announcement about the
phone-business sale and a management confab with analysts in New York. One off-the-record
Qualcomm bear sneered at the company's "PR machine" and accused it of having "analysts in its
pocket," but Pfau dismisses this talk, pointing out that the stock languished in a "trading range" for
years, despite energetic PR.
Certainly, Qualcomm could sail along quite nicely, as the analysts expect. Or the next big shift in
technology could leave it in a lurch, as the shorts are betting. And since even one share of Qualcomm is
an appreciable investment, investors shouldn't hold their breath for the salvation of a squeeze. |
