Could this brokerage be short?
Two posts from the Gorilla Game list. Put a www. in front of the address that the posts are from, enter into your browser and .....
First post
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From: "Calleri, Greg" <Greg_Calleri@natcity.com>
To: "'Gorilla Game discussion list'" <gg@webcom.com>
Subject: RE: A question for QCOM fanatics
Date: Fri, 27 Aug 1999 15:34:28 -0500
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Ron brings up an interesting point. On a similar note I have been in
contact with several of the companies that are part of the standards body
(Lucent, Ericcson, Nokia and Qualcomm). This is what I have found out.
1) When W-CDMA is made the 3G standard and rolled out it becomes free. Yes,
free. That's what a standard is, a policy set by the government to ensure
that all competitors have equal footing.
2) The only proprietary or licensable products become the individual parts
of the network (Chips, handsets, base stations). These products can be made
and sold by anyone without a licensing fee. An example of this is ATM which
is a data networking standard. Both Cisco and Lucent make switches that
work on ATM without paying anyone a licensing or royalty fee. If you don't
believe me than answer this, who gets the licensing fees from GSM?
3) What will happen is that companies will partner with each other to
provide end to end solutions. For example a manufacturer of base stations
would partner with a manufacturer of handsets. So if Qualcomm can
manufacturer or produce the parts necessary for a part of the value chain
they can benefit from that aspect but not the licensing fees.
4) As part of the recent settlement Ericcson does not have to pay royalties
to Qualcomm on current infrastructure sales. Infrastructure is much more
profitable than handsets.
5) Lucent was one of the first to do work in the CDMA field, has numerous
patents and produces chips for the handsets, for that matter so does Nokia
and Ericcson who are both building their own CDMA phones. While qualcomm
currently (before CDMA is made a standard) can force a small vendor to pay
them a fee the large companies have patents to trade. Qualcomm and others
must cross license these patents so it becomes a push.
6) A point to remember in technology, the best technology rarely wins if it
did we would all have Apple computers, run on IBM chips connecting to
networks based on Cabletron switches. Installed base and customer reach are
more important. Few clients ever want to change, even to a better
technology, after its been installed. If you don't believe that than why is
the US still not metric?
7) In terms of the market reaction I can't explain why some stocks are bid
up in the short term but if the market is always right why is Network
Associates at 16 not its high of 68, NEON at 16 not at 78, AMD at 19 not 35?
The examples are endless the market over reacts and is based to some degree
to investor sentiment.
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Second Post
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From: "Calleri, Greg" <Greg_Calleri@natcity.com>
To: "'Gorilla Game discussion list'" <gg@webcom.com>
Subject: RE: A question for QCOM fanatics
Date: Mon, 30 Aug 1999 08:54:10 -0500
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1) the licensing fees are minimal and all the major players have cross
licensing agreements. maybe the word free was the wrong word to use. the
source for that information is Lucent themselves. Also W-CDMA is what is
being rolled out currently in Asia if it wins the 3G standards debate then
QCOM is in more trouble because they don't own the patents on that version.
2) What is important is the net effect to the major players, not what the
fees schedule looks like on the surface. Again the majors have cross
licensing agreements that lead to no or minimal fees. Who cares if a minor
player pays huge fees?
3) Infrastructure tends to be more profitable. I am not speaking of
margins. Infrastructure purchases lead to upgrades, service contracts,
maintenance etc. Look to IBM to see how relationships on lower margin goods
lead to high margin add ons and future purchases.
5)Ericcson has agreed to use QCOM chips currently. However, both Nokia and
ERICY will continue to work on their own products. I would not bet against
them. Motorola makes their own and Lucent claims to make them. A second
point here is that QCOM is rumored (wall street analyst) to be exiting the
handset business in the next year to concentrate on Asics because of the
increased competition. The comment on Ericcson not paying licensing fees is
attributable to several wall street analyst who prefer to remain anonymous.
I know that sounds weak but they can get in trouble with the companies if
they are quoted by name (which is why they are not always able to publish
negative reports)
As far as cross-licenses and Qualcomm's CDMA being more democratic who
cares. What is important is not what happens to the small player but what
happens to those who own the majority of the market. What I said about QCOM
is that the big fees that everyone is quoting is what they charge the small
players. Again the major players have the ability to negotiate because of
their patent portfolios.
6) GSM continues to be upgraded, I don't believe it is 10x slower then CDMA
currently. The point is that regardless of the quality of the technology
you must convince the service providers that it is worth billion for them to
change to the new system. This means that consumers must want and be
willing to pay for high speed data access on their phones. Is there a
crying need for this currently or are people happy with short messaging?
More importantly will they pay an additional $10, $20 or $50 for the
service? If not 3G will be rolled out slowly (5 or more years) and GSM will
continue to hold market share. Without the need to switch service providers
and consumers won't. As for subscriber growth its been growing rapidly for
several years.
7) I agree Ali what I was trying to show was that just because a stock price
is rising doesn't mean its a good investment. People need to do the basic
research into a company rather than say its up $6 today therefore its a good
pick. The market tends to over react in the short term. Buy companies
because they are solid not because their stock price is rising because
stocks do fall.
8)As for the valuation of QCOM. Currently market leaders Microsoft, Intel,
Cisco etc are trading at a fiscal 2000 PEG of 2.2x (PEG is their P/E to
growth rate, for example Microsoft has a fiscal 2000 P/E of 60 and an
estimated future growth rate of 25% or a PEG of 60/25 = 2.4x) (Intel trades
significantly below the average at 1.6x). With that in mind QCOM should
receive a PEG of atleast 1.5X if not higher. If you then believe that QCOM
will earn $4.35 in fiscal 2000 (the difference between consensus earnings of
$3.70 and the $5.00 we have seen here)and that the company will grow at 45%
over the next several years, then the company is worth 1.5 x 45 x 4.35 or
$293. Understand that a discounted cash flow may show a different value.
My point I have been trying to make here has been don't believe the hype
that CDMA will over take the world in 3 years with QCOM getting 5% of all
sales of any CDMA product. Do your own research, understand that other
large companies are not standing by allowing this to happen and understand
the value of a huge installed base. |
