To: Ruffian (52953 )
From: T L Comiskey
Tuesday, Dec 7 1999 3:39PM ET
Reply # of 52958
<From the Street .Com>
Like Its Stock, Qualcomm's Technology Takes On
a 'Life of Its Own'
By Scott Moritz
Staff Reporter
12/7/99 2:55 PM ET
A key driver of Qualcomm's (QCOM:Nasdaq) astronomical rise this year is the
assumption that its superior technology will prevail over better-positioned competitors.
The belief is that Qualcomm's code division multiple access wireless technology will
inevitably become the industry standard. That status would bring Qualcomm, which
develops CDMA chips and has sole claim to all royalties from CDMA chip and handset
licenses, tons of dough.
But industry standard races are rarely easy, and the best technology doesn't always win.
Remember VHS vs. Beta? Windows vs. Mac?
And in this contest, CDMA is far behind, with about 10% of the global market,
according to
Yankee Group, a Boston research firm that has consulted for Qualcomm. Three years
from now, CDMA will have all of 15% market share, Yankee Group predicts.
It's also possible that there won't even be a true global standard for another 10 years, if
ever. Even if CDMA emerges as a key piece of a global standard, it'll be difficult for
Qualcomm to hold on to its estimated 5% royalty take, analysts say. And for a company
that's shedding its manufacturing businesses to focus more on research and collecting
licensing fees and patent royalties, that 5% means everything.
So given all this -- and the little fact that Qualcomm's shares have soared some 1,450%
this
year -- the stock looks, well, ahead of itself. Qualcomm declines to comment about its
stock
price.
Leaving the Flock
Three analysts have recently downgraded Qualcomm to a hold, including Dave Powers,
an
analyst with Edward Jones who issued his new rating late last month because the
stock's run-up was "ahead of underlying fundamentals." (Edward Jones hasn't
participated
in recent underwriting for Qualcomm.)
Powers says momentum investing, stock-split euphoria, a short squeeze and the Nasdaq
buying frenzy all have contributed to Qualcomm's overvaluation.
At midday Tuesday, Qualcomm shares were up 9 1/4, or 2.3%, to 404. At that price,
Qualcomm's market capitalization is around $66 billion and its price-to-earnings ratio is
318.
Of course, Qualcomm concedes CDMA might not become the global standard.
"Nothing in
this world is guaranteed," says a Qualcomm spokeswoman. "But we believe that our
patents definitely apply to any 3G standard based on CDMA," referring to the so-called
third-generation wireless standard that analysts say might prevail within a decade or so.
A study committee of the International Telecommunications Union, a United
Nations-sponsored tech standards board, has recommended that three CDMA-based
standards be adopted as the future third-generation standard. The ITU may vote on the
recommendation as early as next month.
But the market may not listen to the ITU, and there's plenty of competition for it to
choose
from.
Crowded House
The trade associations representing the two top systems -- time division multiple access,
or
TDMA, and the TDMA-based global systems for mobile communications, or GSM --
formed
an alliance in February to cooperate on a compatible standard for Internet access and
other
data services, building an even more formidable competitor. (With GSM and TDMA,
conversations are broken up into digital bits and sent on timed intervals -- hence time
division. CDMA, which was originally developed by the military and applied to
consumer use
by Qualcomm starting in 1989, affixes a code on the packet of digital bits and spreads
the
delivery of the packets over a broad frequency spectrum. Receivers can identify the
code
and pull in the intended string of packets.)
"They have some technological advantage, but it's not clear in the long run that they have
the only wireless standard," says David Clott, a money manager at Commercial Union, a
U.K. insurance and investment firm. "If application developers are working on the
standard, it could mean trouble for Qualcomm." Clott has no position in Qualcomm,
though
he holds AT&T (T:NYSE) and a number of the regional Bell companies that could
compete
with Qualcomm.
3G Glasses
"With the hype and anticipation so high right now, the whole 3G thing has taken on a life
of
its own," says Brian Cotton, director of telecommunications consulting for Frost &
Sullivan. But a lot can happen between now and then, he says. "There are a lot of smart
people working on a lot of potential magic bullets," says Cotton, who hasn't consulted
for
Qualcomm but has consulted for its competitors Lucent (LU:NYSE) and Ericsson
(ERICY:Nasdaq ADR).
Cotton says the top telecom technology companies such as Lucent, Ericsson and Nortel
(NT:NYSE) could easily create a critical piece of the 3G infrastructure and use it as
leverage against Qualcomm. In the worst-case scenario, Qualcomm could have to share
some of its licensing revenue to be a part of the killer networking solution, says Cotton.
Still, other analysts say that may be a misreading of who really holds the power. While
the
infrastructure developers create the playing field, Qualcomm's CDMA is carrying the
ball.
"The bears would say they won't get any royalties, but I think they will, though they will
probably get diluted," says the manager of a major hedge fund who asked not to be
identified but holds a large Qualcomm position. "But even if it is diluted, you are talking
about
a market that is going to be enormous."
Maybe. But given the technology's rapid innovation cycle, Qualcomm's CDMA world
dominance is anything but a sure bet. |
