SSB Complete.
JohnG
QUALCOMM, Inc. (QCOM)
QCOM: 3G Standards all Converge on CDMA; A 1H (Buy, High Risk)
Big Plus for QCOM Mkt Cap: $55,296.6 mil.
May 25, 2000 SUMMARY
a Fears overblown and we continue to recommned with a 1H
TELECOMMUNICATIONS rating
EQUIPMENT * China Unicom potential is strictly upside to our
Alex M. Cena estimates. No one in their right mind would include
China in their forecasts.
* The migration path for GSM to 3G is CDMA.
Karen O. Nielsen * South Korea's subsidy elimination has happened 2
times before and the carriers have always figured out
other creative sales techniques.
Thomas Robillard JR * QCOM still is the best way to play CDMAOne today and
W-CDMA and CDMA2000 in the future.
FUNDAMENTALS
P/E (9/00E) 62.7x
P/E (9/01E) 47.6x
TEV/EBITDA (9/00E) NA
TEV/EBITDA (9/01E) NA
Book Value/Share (9/00E) NA
Price/Book Value NA
Dividend/Yield (9/00E) NA/NA
Revenue (9/00E) $2,986.3 mil.
Proj. Long-Term EPS Growth 0%
ROE (9/00E) 113.8%
Long-Term Debt to Capital(a) NA
QCOM is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (5/25/00) $69.00 Current Rating 1H
52-Week Range $179.31-$22.89 Prior Rating 1H
Shares Outstanding(a) 801.4 mil. Current Target Price $200.00
Convertible No Previous Target Price $200.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
9/99A Actual $0.08A $0.10A $0.19A $0.23A $0.62A
9/00E Current $0.26A $0.26A $0.27E $0.31E $1.10E
Previous $0.26A $0.26A $0.27E $0.31E $1.10E
9/01E Current NA NA NA NA $1.45E
Previous NA NA NA NA $1.45E
9/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 9/00E $1.08; 9/01E $1.42; 9/02E NA
Calendar Year EPS: 12/99A $1.70; 12/00E NA; 12/01E NA; 12/02E NA
OPINION
Over the past several days there have been two news stories that, in our
opinion, have caused undue pressure in shares of QUALCOMM. The first was a
story surrounding China Unicom and the "supposed" decision to choose GSM
rather than use CDMA. The second was an article in Wednesday's South Korean
papers indicating the South Korean Ministry of Information and
Communication's (MIC) intention to eliminate handset subsidies. We believe
the fears are overblown and we continue to rate Qualcomm with a 1H rating.
In reference to the story surrounding China Unicom's intention to deploy GSM
rather than CDMA we continue to point out to investors that any news that
descends from China should be viewed as a "piece of the puzzle," (i.e. it is
very difficult to make a prediction of what the whole picture will resemble
when only looking at one piece). As we have stated in the past, we believe
investors should view China as "pure upside" to any CDMA forecasts simply
because analysts and industry gurus have been making predictions of the
timing of CDMA in China for the past several years and to date there remains
no commercial deployment. In fact, we would go so far as to view China as
upside when the vendors start to get paid as opposed to when contracts are
awarded and shipments begin. In the past, contracts have always been subject
to change.
We believe CDMA will eventually be deployed in China based on three reasons.
First, China Unicom is entertaining 12 different equipment offers from
manufacturers to build out its CDMA network. Secondly, the passing of the
China Trade Bill on Wednesday in the House indicates that China's entry in
the WTO is moving in the right direction. We point out that the delay of
CDMA deployments in China was due to politics in China surrounding its entry
into the WTO. We continue to believe that CDMA will be given the green light
upon China's entry into the WTO. Third, If China Unicom were to focus on
GSM, the migration path to 3G is W-CDMA.
The second news item that has put pressure on QUALCOMM's shares over the past
two days is the concern over South Korea's elimination of handset subsidies.
On Wednesday the MIC indicated it was banning handset subsidies from the
wireless service providers beginning on June 1, 2000. We believe this will
have little, if any, impact on QUALCOMM for four reasons.
First, this is the third time in 15 months that a handset subsidy reduction
has surfaced in the South Korean market. The first time was on April 1, 1999
where the MIC forced operators to reduce their subsidies by 50%. The second
time was on October 1, 1999 when 4 of the 5 operators in South Korea
voluntarily lowered their handset subsidies. During the second and fourth
quarters of 1999 South Korea added an average of 810,000 and 974,000 new
subscribers per month, respectively. During 1998 Korea only added
approximately 600,000 new subscribers per month with handset subsidies intact
the entire year.
Second, we believe the operators will continue to drive new subscription
sales despite the elimination of the handset subsidy. We believe operators
will find ways around this ruling to help entice potential customers to sign
up for wireless service such as reducing the cost of service or providing a
new subscriber several months of free service to offset the higher phone
cost, which is the strategy used by operators in markets with high
penetration rates despite the lack of handset subsidies (i.e. Finland).
The biggest "near-term" impact surrounding the elimination of the handset
subsidy is the potential impact to replacement sales. We believe this will
have a slight impact to replacement handset sales this year as consumers must
digest the new pricing environment. However we believe this will not have a
long-term impact to replacement sales because of 1) the continued advancement
in phones in the Korean market (i.e., lighter, increased functionality and
battery life as well as increased "lifestyle" offerings) and 2) the
deployment of data services, which will require a new handset.
Third, we believe our current subscriber estimates for 2000 in South Korea
are conservative. Through the end of April, South Korea added 3.4 million
new subscribers. Our current estimate is for 5.5 million net additions for
the full year. Based on our estimates, average net additions per month would
slow to approximately 263,000 for the remainder of the year, which compares
to an average of 850,000 per month for the first four months of this year. A
scenario we believe will be unlikely. Therefore we believe any shortfall in
replacement handset sales this year should be partially accounted for by
better than expected subscriber growth.
Fourth, the impact of South Korea on CDMA subscriber growth and handset sales
continues to decline as regions like the U.S., Latin America, Japan and
Australia/New Zealand continue to witness rapid subscriber growth. In fact,
South Korea represented 48% of total worldwide CDMA subscribers at the end of
1999 down from 61% at the end of 1998. We estimate South Korea will
represent only 35% of total CDMA subscribers by the end of 2000.
In summary, we believe that the impact on QUALCOMM's shares as a result of
these news items has been overblown. We would be buying at these levels
given our continued believe that the long-term fundamentals for both QUALCOMM
and the wireless industry remain intact.
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