This might help, it was posted by Rich tonite>
It's TRJ, the crazy guy who is not as optimistic as Volts, yet always bullish on the Q. Some real good earlier posts
that questioned Q's valuations appeared earlier and I wish that I kept all my models from earlier posts bookmarked. On the
other hand, perhaps it is good to start fresh every few months. Unfortunately, I do not have my dataquest numbers at home
with me, so I will have to make a few assumptions, but I will try and be very conservative. So the story goes:
How to do you place a valuation on a company that is predicted to grow it's yearly EPS by 50% a year for the next five
years? Even harder is to try and valuate the same company when it continues to blow those 50% projections out of the
water. As much as I would love to speculate about HDR, China and WCDMA, the truth of the matter is that all that 'is'
speculation. Although I buy speculative stocks, I would not invest 30% of my portfolio in them. When I first bought Q it was
speculative and 1% of my portfolio. As I figured out its' earning path, it went from speculative to medium risk in a short
time. As did the increase in my position. So, for today, let's focus on what is real. what is in the cards for Q over the next
three years? I am using three years because I don't see any 3G alternatives before then. Thus, we can draw concrete
conclusions over that period of time. So here are the factors that contribute to Q's value.
1. P/E
I won't do it here, but I can debate with anyone that a company that exceeds EPS growth of 50% a year for the next three
years deserves a P/E of 100+. IF you disagree, let's debate P/Es in a separate post. IMO, as long as Q grows EPS by
12-20% per quarter, there is no P/E that is too high.
2. CDMA growth
Typically, I would include earnings after P/E, but because Q's earnings have mirrored (actually exceeded) CDMA
subscriber growth, I feel it is logical to include this one before we discuss earnings. In December of 1998, all the major
communications analysts called for CDMA to grow by 35-50% for the next 5 years. Well, as we know. They were a bit
conservative. They underestimated two things. The first and most important was the growth of wireless. The second was
QCOM's ability to sell and grow worldwide CDMA acceptance. In December of 98, there were a total of 23M worldwide
CDMA subs - an increase from 8M the year before. In Q3 (jul-sept) of this year, 7.5M subs were added. A staggering
increase of 22% over the previous quarter. This put total subscribers at 42M. Almost double from the year before with still
our best quarter in fromnt of us. The pros had called for about 35M by end of 1999 and it look as if we will finish closer to
48-50M. Expect a slowdown? Not at all. A 50% increase in the year 2000 would represent an end of the year number of
75M subs or 25M new subs in 2000. Need 112M in 2001 and 160M at end of the year 2002. 2001 represents the
commercial launch of IXRTT (2.5G) in Korea and North America which increase CDMA equipment sales significantly,
although I will not speculate on how this will increase sub growth. Not because I don't think it will (IT WILL), but because I
would like to continue focusing on the conservative. So, keep track of the CDMA growth numbers. They have always been
the key. Why? Two reasons:
1. Because QCOM is paid an ASIC royally and a phone royalty on every CDMA phone sold, their EPS growth can
conservatively be drawn in parallel
2. The biggy. CDMA subscriber growth is the key, but CDMA replacement phones are the reason that you have a goldmine
in your portfolio. As the total number of subscriber 'base' grows, the number of replacement phones tell a new story.
QCOM owns the CDMA ASIC world. In a WORST case scenario, QCOM may have only 50% of the CDMA ASIC
market. Although I think that 70-85% is a more realistic worst case scenario, I want to be very clear. 50% of the market
will allow QCOM to continue EPS growth 'well' above 50% a year. But we don't have to worry about losing ASIC share.
Why? Simple - QCOM just announced successful trials of their 1XRTT chip and software. To date, MOT, Samsung,
DSPC, LSI or Nokia have not been able to develop a chip that is half as competitive as the MSM. In fact, half of those
companies don't even have chips in high volume manufacturing. With the exception of MOT and NOK who have jokes for
ASICs, everyone else is stillwaiting for HV. So as they finish up their inferior chips that have higher cost and analog-like
performance, QCOM is sampling a product (1XRTT) that represents a two year development headstart on a CDMAOne
chip.
To be continued....
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