..i dont like to post..but follow the g&k thread closely..i found this article on the qcom thread..and of course wanted to ask your opinion of it...i hope you dont mind me asking this in an open forum..i am a qcom shareholder and plan on holding long term but ,i thought the idea of qcom being a true gorrilla meant it had a stronger hold against competition..does that mean we have to reevaluate our definition of gorrilla with respect to qcom?? thx...sue
April 20, 2000
StockHouse News Desk
By Jack J. Bensimon (jbensimon@stockhouse.com)
NASDAQ-100 Columnist
Qualcomm Valuation Questioned By Analysts, Competition Heats Up
With a strong recent quarter including earnings ahead of analyst estimates, Qualcomm shares have
been edging higher based on its forecasted 10-year royalty stream. However, with competition
intensifying in the wireless space, analysts are seriously questioning the assumptions made to arrive
at such lofty valuations.
Toronto, ONT, April 20 /SHfn/ -- The world of wireless telecommunications has unequivocally changed the way
humans interact
with one another. The convergence Internet, telecommunications, and media is expected to further reshape the
communications
landscape. In the wireless space, Qualcomm [QCOM] has emerged as a leader in providing the sophisticated
microchips
necessary to deliver top-flight quality communication.
Qualcomm's recent earnings release was above analyst forecasts, coming in at $0.26 per share versus the expected
$0.18 per
share. And the company's growth has been nothing short of impressive, as the stock has soared over 2,600% from
its IPO price.
However, despite the company's strong earnings release and respectable 90% foothold in the market
for CDMA chips, there are variables that Wall Street analysts have failed to consider as part of their
proprietary valuation models. There is industry evidence to suggest that the underlying assumptions
Qualcomm executives and brokerage analysts have made are highly questionable, raising doubts
concerning the sustainability of the current share price.
Competition in the space is heating up
Although Qualcomm has secured over 90% of the CDMA chip market, there is evidence suggesting
that there is increasing competition in the pipeline. And the competition promises to be daunting--Ericsson
[ERICY] and Motorola
[MOT] are considered goliaths in the wireless sector, with both posting strong brand equity and a global presence
to boot.
For example, Ericsson and Motorola, among others, are developing rival technologies in an attempt to neutralize
Qualcomm's ability
to leverage its patent to secure high royalties--royalties that can range anywhere from 4 to 5%. "Qualcomm will not
get rich off of
Ericsson," says Ericsson spokesperson Kathy Egan. And other competitors are coming in the pipeline, ranging from
Phillips
Semiconductors, LSI Logic [LSI], and Samsung Semiconductors-companies that will give Qualcomm a good run
for their money.
"The intellectual property will be so spread out that Qualcomm won't have the power it has now," notes analyst
Craig Ellingsworth of
Yankee Research.
And it is not just Qualcomm's competitors that believe it will not have the lion's share of the market. Leading
brokerage firms have
lowered their market share estimates for Qualcomm. Merrill Lynch [MER] estimates Qualcomm's share of the
CDMA chip market
will drop from 90% in 1999 to 50% by 2003. In addition, given the market's recent technology stock meltdown,
brokers are
emphasizing the notion of sector rotation into companies with solid fundamentals and away from the
momentum-based buying that
buoyed Qualcomm stock in 1999.
Sector rotation into the strongest and most consistent growth stocks "is a sign that fundamentals do count--and will
probably
continue to drive at least the near-term buying momentum within the marketplace," argues chief investment strategist
Brian Belski of
George K. Baum & Co. JP Morgan's telecom analyst Greg Geiling strongly believes that the wireless space will
see a flight to
quality into companies that are coming through on both the top- and bottom-line, with less focus on stocks trading
primarily on
momentum.
Qualcomm's expected future royalty streams are unrealistic
It was only a few months ago that Paine Webber analyst Walt Piecyk had a one-year $1,000 (pre-split) target for
Qualcomm shares.
Although Piecyk has been revered on Wall Street for his bullish Qualcomm sentiment, a close analysis of Piecyk's
valuation model
and assumptions casts doubt on the credibility of such lofty targets.
First: Piecyk's analysis assumes 3 billion mobile phones and other wireless devices by 2010. Based
on current population/demographic growth patterns, this would imply that one of every two people
inhabiting the planet would have a wireless device. This assumption is not supported with any sort of
credible empirical data. What Piecyk has failed to consider is the average per-capita income required
to reach such an estimate.
Second: Piecyk's model assumes that 85% would use the technology that Qualcomm has patented,
leaving a paltry 15% of the balance for the rivals to split. This is despite the financial and marketing
prowess of those rivals. Piecyk fails to consider that according to Micrologic Research, only 40 million of the 220
million units sold in
1999 used the CDMA platform, representing less than 20% of the available market.
Third: Paine Webber's analysis fails to factor in the well-established trend of decreasing prices. The average price
of cell phones is
expected to decline from the current level of $180 to $130 by as early as next year. The natural conclusion is that
royalties can also
be expected to decline, from the current average of 5%, to 1-2%. Gartner Group analyst Bob Egan forecasts
Qualcomm royalties
dropping as low as 3% for the next two years, and then 2.5% thereafter. If these predictions come close to being
true, Piecyk's
estimates of Qualcomm reaping $15-20 billion in royalties by 2010 will be far off the mark, especially with
increased competition over
the next 10 years.
Fourth: Although Qualcomm indisputably has a short-term sustainable competitive advantage by securing key
patents for digital
wireless technologies, even Piecyk has commented that "one of the greatest risks [for Qualcomm] is the adoption
of wireless data
services." Most CDMA wireless technology in use is based on 2G (Second Generation) technology, while
Qualcomm is pinning its
hopes for the future on its intellectual property related to 3G (Third Generation) systems. Further evidence of
concern can be seen in
some of the brokerage firms' market sales forecasts. Recent estimates put sales growth for CDMA mobile phones
at more than 50%
this year, to 65 million units, followed by 95 million units by 2001, and 200 million units by 2002.
The bottom line is that Qualcomm has had an impressive record for strong strategic execution coupled with an
obsessive drive
towards creative innovation in the space. However, investors should not underestimate the competitive impact of
companies like
Ericsson, Motorola, LSI Logic, Phillips Semiconductors, and Samsung Semiconductors as they enter the space.
Investors should
also pay close attention to lofty valuation models that often use misleading metrics. |
