Qualcomm's Investors Have Reasons to Look Back: David Wilson
--From AtHome News. Sounds like the guy missed the conference call.--- Cooters
Qualcomm's Investors Have Reasons to Look Back: David Wilson (Commentary)
Princeton, New Jersey, Jan. 27 (Bloomberg) -- Qualcomm Inc.'s stockholders may wish they had the power to turn back the calendar.
Shares of the San Diego-based company, whose technology is fast becoming a worldwide standard for digital wireless phones, have fallen 29 percent this month. That's a reversal of fortune from 1999, when the stock surged more than 25-fold and was the best performer in the Standard & Poor's 500 index.
Almost half the decline followed Qualcomm's warning late Tuesday that shipments of phone chips and cell phones may drop in the current quarter from the December quarter. Analysts at Merrill Lynch & Co. and Salomon Smith Barney lowered the stock's rating after the forecast.
Looking ahead, Qualcomm faces new competition from Motorola Inc. in the phone-chip business, soon to be its biggest source of revenue. It also has to hope that Globalstar Telecommunications Ltd.'s satellite-telephone network, for which it's producing phones, can attract customers.
Even if those issues don't amount to much -- or anything at all -- the stock still isn't a bargain. It ranks among the 10 most expensive shares in the S&P 500 when compared with earnings, sales or ``book value,' the value of its assets.
And the potential earnings growth ``isn't what we've had in the past,' said Michael Ching, the Merrill Lynch analyst who cut his firm's rating to ``neutral' from ``outperform' for the next three to six months.
Ching says he expects earnings to increase 35 percent during the second half of the fiscal year ending in September. Net income jumped 84 percent during the last fiscal year, to $201 million.
Winning With CDMA
Qualcomm's shares peaked at 200 on Jan. 3, compared with an adjusted price of about 7 a year earlier. The surge prompted the company to split its stock twice last year: 2-for-1 in May, and 4- for-1 in December.
The stock's performance reflected phone companies' increasing acceptance of its code-division multiple access technology -- CDMA for short -- as the standard for digital wireless networks.
CDMA-based networks have 10 to 20 times the capacity of analog networks, which rely on sound waves instead of digital signals to carry people's conversations. That's far more than the tripling of capacity available through a competing digital technology known as time-division multiple access, or TDMA.
Eighty-five percent of wireless phones will use CDMA by the end of the decade, up from 18 percent at the end of the 1990s, according to a forecast made last month by Paine Webber Inc. analyst Walter Piecyk.
Qualcomm makes money by licensing the technology to the makers of phones and phone equipment. Royalties from licenses amounted to 16 percent of revenue during the quarter ended in December, double the percentage of the December 1998 quarter.
Yesterday Qualcomm took a step to increase licensing revenue by agreeing to purchase SnapTrack Inc. for $1 billion in stock. The closely held company has developed a semiconductor design that enables wireless phones to identify where people are when they make calls.
Competing in Chips
As the royalties have risen, the company has pulled back from manufacturing CDMA-based products. Last May, it sold a business to Sweden's Ericsson AB that produces wireless-network equipment. The sale, for an undisclosed price, was part of an agreement ending a patent dispute between the two companies.
Then, in December, it agreed to sell a unit to Kyocera Corp. that makes phones for land-based networks, rather than systems such as Globalstar. Although financial terms weren't disclosed, the Japanese company agreed to use Qualcomm's chips in its phones for the next five years.
Motorola, the world's second-largest mobile-phone maker behind Finland's Nokia Oyj, uses its own chips in CDMA phones. The company plans to start selling the chips to other companies this year. By year-end, it also expects to introduce chips that will enable phones to handle CDMA, TDMA and a standard used in many European and Asian networks: GSM, or global system for mobile communications. ``We are clearly making progress in the direction of diversifying our sales,' said Mario Rivas, general manager of Motorola's wireless subscriber systems group.
Qualcomm sold 14.5 million chips in the December quarter, and the business represented 31.5 percent of sales during the period. The latter trailed only the 39.5 percent figure for the phone- making business being sold to Kyocera. Chip sales climbed 82 percent to $352.4 million from $193.3 million a year earlier.
Doubting Globalstar
Motorola's entry into the business is ``something to watch out for,' Merrill's Ching said. Qualcomm now holds 90 percent of the market, and ``it will be quite a challenge for the company to maintain that kind of market share,' he said.
Then again, if Motorola takes away some of the company's sales, it can still count on royalty payments from its rival. And royalties increased even faster than chip sales in percentage terms during the December quarter. They jumped to $177.5 million from $74.1 million, a 140 percent increase.
That option isn't available with Globalstar, which is trying to become the first satellite-phone company to make a profit. Two rivals, Iridium LLC and ICO Global Communications Ltd., filed for bankruptcy in August.
Qualcomm is supplying phones for use with Globalstar's service, provided through phone companies. The company shipped 29,000 phones during the December quarter, and said it can produce another 10,000 per month.
Globalstar, 45 percent-owned by Loral Space & Communications Ltd., aims to sign up 1 million subscribers by the end of this year. It's charging about $1,500 for phones, and about $1.50 a minute for service.
Three weeks ago, the stock declined 13 percent in a day after a Merrill Lynch analyst, Tom Watts, said the prices and competition from other companies might prevent it from meeting its target. It has yet to recoup the loss.
High-Priced Stock
Even if Globalstar succeeds, Qualcomm's shares may not benefit much because they're already so high-priced. Even after the stock's decline this month, it trades at 162 times earnings and 23.2 times revenue for the past 12 months, as well as 28.1 times book value,
All three ratios are among the 10 highest for S&P 500 stocks. Only two other companies' shares rank that high across the board: Yahoo! Inc., the No. 1 Internet search service, and America Online Inc., the No. 1 online service.
Numbers like those suggest there isn't much room for disappointments like yesterday's -- or any future ones. |
