QUALCOMM Incorporated
QCOM - NASDAQ $130
Prudential Volpe Technology Group
February 18, 2000
EPS 1999A 2000E 2001E Investment Opinion STRONG BUY
Q1 $0.08 $0.26A $0.35 Risk Level
Price Target
High
$183
Q2 $0.10 $0.25 $0.35 52-Week Price Range $200-$7 7/8
Q3 $0.19 $0.28 $0.47 Shares Out. (million) 142.2
Q4 $0.23 $0.31 $0.45 Market Cap. (million) $18,489.9
Year (Sep) $0.60 $1.11 $1.63 3-Yr. Est. EPS Growth (EEG) 35%
P/E N/M N/M 79.8x
First Call
Prior Est. $0.60 $1.02 $1.35
Revs. (M) $3,937 $4,065 $5,041
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QCOM:Optimistic Analyst Meeting;Raising Rating To A Strong Buy
-QUALCOMM held an upbeat analyst day highlighting the company's opportunities
-We are raising our rating to a STRONG BUY from an Accumulate
-We are raising our 2000 EPS to $1.11 from $1.02 and 2001 EPS to $1.63 from $1.35
-There are a number of near term catalysts which could help push the stock higher
-In our view, we've entered a new stage in wireless that emphasizes systems knowledge over
connectivity
-QCOM is the creator and owner of rights to CDMA, the most advanced digital wireless technology
-The opportunity in China could be large and completes CDMA's encirclement of the Pacific Rim
We are raising our rating to a STRONG BUY and increasing EPS after QUALCOMM's
upbeat analyst meeting. At the QUALCOMM's analyst meeting yesterday, the company
highlighted the breadth and size of the opportunity for QUALCOMM and CDMA worldwide. Chinese
contract announcements, ASICs growth, the possibility of a CDMA 450 MHZ network in Europe and
wireless data applications were just a sampling of the near term catalysts that could drive the stock.
We have entered a new stage in wireless data were new applications and the systems integration
they require should become more important than just pure connectivity. We are raising our numbers
based on the opportunity in China and the increased financial visibility after the sale of the handset
business sale is complete. As a result of these factors, we are raising our rating on QCOM to a
STRONG BUY.
We are raising our numbers to reflect the sale of the handset business and the opportunity
in China. The sale of the handset business should place gross margins above 60% for the long term
and keep operating margins in the low to mid 40% range. These margins are a result of the
company's domination of the CDMA chipset market as well as royalties (which go directly to the
bottom line) making up a larger percentage of revenues. Additionally we have increased our
subscriber numbers in our model to reflect the opportunity in China, though we are still on the
conservative side adding only 1.5 million Chinese CDMA subscribers to F2000 and 7 million
subscribers to fiscal 2001 numbers.
There are a number of near term catalysts that could help push the stock higher. The
meeting was refreshing after the company's ho-hum December quarter conference call and should
bring some positive attention back to the story. We believe there are a number of events that could
help the stock over the next several months. The first of these would be the announcement of
Chinese licensee contracts which should help to increase visibility in that country. Another
near-term catalyst should be progress on the reallocation of the 450 MHz spectrum in Europe from
an
analog network to a CDMA network. Additionally, we believe ASIC announcements in the transition
to 1X and HDR combined with QCOM potentially grabbing more of the silicon in a handset would
drive top-line as well as secure future revenue streams.
We've entered a new stage in wireless data that emphasizes systems knowledge over pure
connectivity. Pure bandwidth, while still important and a competitive advantage for CDMA and
QCOM, is no longer the only value the company brings to the table. Applications could include
location-based services, music, BlueTooth, voice response and all the possible combinations of these
features that require systems integration between the software and the components. wireless is
maturing and a platform must be in place to enable OEM's and software designers' speed to market.
The opportunity in China could be large and completes CDMA's encirclement of the Pacific
Rim. While the initial ramp in China may be slower than the immediate 10 million new subscribers
projected by China Unicom, the market still presents outstanding opportunity. The wireless
subscriber penetration in China (approximately 3%) is very low compared to other markets such as
North America (approximately 30%) and China has four times the population. We believe that the
development that we are seeing in the Chinese market would more than double the addressable
CDMA market compared to its current levels. China would complete CDMA's predominance in the
pacific as it has a strong or growing presence in Japan, Korea, Australia, China, North America, and
to some extent South America.
QCOM is the creator and owner of the rights to CDMA. CDMA is the fastest growing wireless
digital standard in the world, competing with GSM technology for global network deployments.
CDMA
is considered the best digital wireless technology in terms of capacity, sound quality, and data
throughput with a projected 5-year CAGR of 74%. Fast product cycles in CDMA only help to
strengthen QCOM's ownership of the handset as well as challenge slower evolving GSM
technologies.
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