4. RETHINKING THE QUALCOMM VALUATION
By Kenneth A. Toudouze, CFA
After listening to the Nokia (NOK) conference, we came away with several
pieces of valuable information. One of these was the confidence of the
CEO that Nokia will become No. 1 in CDMA handset manufacturing.
The acknowledgment that Nokia wants to dominate CDMA handsets, coupled
with Ericsson's (ERICY) resolve to gain 3% of additional market share
(12-15%), bodes well for Qualcomm (QCOM). This also is a positive for
Ericsson, because, as The StreetAdvisor mentioned February 1, it benefits
from the infrastructure sales, each time CDMA is deployed.
The decision by Unicom in China to license Qualcomm's CDMA technology will
be a momentous one. The bigger picture question is how big that market is
for Qualcomm. Unicom has indicated it intends to deploy a network with
capacity of more than 10 million subscribers by year-end. This plan is
probably optimistic, given the delayed agreement, but it could certainly
happen by 2001. Assuming 10 million CDMA handsets are sold at $200 per
unit in 2001, this is a $2 billion a year market opportunity, and Qualcomm
will reap $40 million (2%) in royalty fees per year from China alone
($0.01 of earnings per share per quarter). Assuming Qualcomm can sell a
few ASICs (chips) to handset manufacturers, it can profit from this as
well.
Qualcomm is scheduling an investor meeting on February 17th, which should
also add spark to the stock. At the meeting, we would look for more
information regarding the high data rate (HDR) initiatives and Internet
access through wireless devices. In addition, we will look for more data
regarding the Kyocera (KYO) deal and news that it is moving along faster
than originally anticipated. Although we cannot get excited about the
current valuation of Qualcomm, we admit there are excellent catalysts in
front of the stock to make it go higher.
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