Qualcomm In China: Soap Opera Plot Too Much For Wall St
By JOHNATHAN BURNS
NEW YORK -- In the brittle world where politics, technology and money meet, Qualcomm Inc. (QCOM) has played the fortune- tossed lover left at the altar by the fickle groom.
And every day, like some long-running soap opera, the drama unfolds anew: Will China take back Qualcomm? Will China dump Qualcomm again? What wireless equipment standard is China two-timing Qualcomm with?
It is the kind of plot that leaves Wall Street with little confidence in predicting an ending - which shows in Qualcomm's stock, off more than 60% from its 52-week high set in January.
The twists to the story have been well documented. They have also been exasperating for Qualcomm Chief Executive Irwin Jacobs.
"It's been quite confusing," he said. "But it is still a very fluid situation."
The situation is this: China, the world's third largest and still relatively undeveloped cellular market, may or may not use Qualcomm's CDMA technology as a building block for a nationwide wireless network.
On Thursday, a state-run newspaper quoted a China United Telecommunications Corp. spokesman as saying the company's plan to roll-out a CDMA network are "still on track."
That directly contradicts what sources have told The Wall Street Journal, which reports the company, known as China Unicom, will further deploy a wireless network based on the competing GSM technology. In addition to this and other newswires, Dow Jones & Co. publishes The Wall Street Journal and its international and interactive editions.
If the latter proves true, that means relatively little of the $25 billion the Chinese are expected to spend this year on wireless networks - as projected by Lehman Brothers telecommunications equipment analyst Tim Luke - will flow into Qualcomm's coffers.
Luke does, however, point out that China Unicom representatives said this week they will likely trial a next-generation CDMA technology.
And while one hand at China Unicom apparently doesn't know what the other hand is doing, the contradictions have clearly given investors the jitters.
In the last month, Qualcomm's stock has dropped from a May 2 closing price of 113 11/16 to 66 3/8 Wednesday.
Part of the pressure has been a result of a broad tech-sector sell off. But two other factors have also come into play. Qualcomm continues to be assaulted by rumors of competitors, like Motorola Inc. (MOT), developing their own CDMA-based technology for advanced generations of mobile networks.
"Does our intellectual property rights apply to third generation CDMA?" said Jacobs. "Yes."
Jacobs, understandably, is insistent that any CDMA technology developed and commercially sold in the future won't be able to skirt Qualcomm's licensing and royalty requirements.
The other pressure point to Qualcomm's stock was applied last week by the South Korean Ministry of Information and Communication, which ordered an end to the practice of handset subsidies. The edict, which officially went into effect Thursday, means mobile phone service providers can no longer support the prices of mobile phones given to new customers.
Jacobs, taking an optimist's view on the ruling, noted the Korean ministry had made similar rulings in the past that didn't stick. Korea accounts for 21% of worldwide CDMA handsets sold.
"I think this is the second or third time they've made that ruling," he said. "It's happened before, and we've seen a delay in volume for a month or two in the past."
The change has not previously affected the financial results of a single Qualcomm quarter.
"Korea is going to be a tremendous replacement market," Jacobs noted, referring to customers who get rid of older phones for newer ones. "(Korea) continues to drop as a share of our market."
But it has been the ever-present China question that has bogged down Qualcomm's stock.
No market has the apparent potential of China. At the end of 1999, the country's cellular phone service providers reported a total of about 44 million subscribers, according to Jardine Fleming Research.
That amounts to a puny penetration rate of 3.5%.
Jacobs said it is not a question of if Chinese cellular phones use Qualcomm's technology, it is a question of when.
He says that upcoming generations of CDMA are "backward" compatible with competing technologies. And he stresses that CDMA technology has more capacity for data applications that competing technologies.
"I think wireless Internet access will begin to build in importance," Jacobs said. "CDMA will be very well positioned to support that."
Mark Lowenstein, a wireless industry consultant with Yankee Group, said it remains unclear what position Qualcomm will hold in future generations of wireless technology.
"Third generation (cellular technology) will be implemented in most developed cellular economies in the next two to five years," he said. "There will be some sort of convergence, and CDMA is one of the main building blocks by other companies to make sure they don't have exclusive control. It's going to be a major battle."
But Yankee Group's Lowenstein does believe Qualcomm will hold an important role in future wireless communications technology.
"The people who are hitting Qualcomm now do not have long-term vision," he said. "I think you have to take a long-term view, and Qualcomm will be a very important force."
Wall Street observers are split over the issue.
Ed Snyder, telecommunications equipment analyst with Chase H&Q, believes Qualcomm's stock hasn't yet reached bottom.
"Our theory has always been China will not deploy a CDMA network," he said.
Snyder said wireless networks using competing technology are already too widely installed for a new CDMA network to be built.
Mark Roberts, wireless communications equipment analyst with First Union Securities, sees things differently.
"The underpinnings are very visible, very stable," he said. "Once people get over their fear, the stock will rise."
Roberts said he believes China Unicom will still deploy a CDMA network.
Lehman analyst Luke noted that China Unicom officials said the company is likely to inherit seven trial CDMA networks which the country's military is now building.
And Roberts believes Qualcomm won't be significantly damaged by the end of handset subsidies in Korea. He said Samsung Corp., one of the largest makers of CDMA phones, will use any decrease in Korean demand to fill orders it couldn't previously meet in other markets.
Roberts sees Qualcomm's slide as coinciding with that of "dot-com" stocks.
"I think it's being sold off as part of that group," he said.
Jacobs bristles at the thought that Qualcomm is being lumped in with Internet companies who have no history of money-making.
"We make a profit," he said. "Momentum sometimes carries people forward and carries them back."
Qualcomm's wireless-equipment peers like Nokia Corp. (NOK) and Ericsson Telephone Co. (ERICY) have weathered the recent slide in tech stocks better. Nokia's and Ericsson's American depository receipts are down only marginally from their 52-week highs. Motorola is down significantly from its 52-week high of 184 5/8, closing regular trading Thursday at 99, but mainly because it lowered expectations for the full fiscal year in early April.
Qualcomm hasn't issued similar profit warnings.
But in a market almost guilty about the excess of last year's tech stock run-up, it doesn't take much for Qualcomm's stock price to get hammered.
After all, the company has set the record for single-year appreciation among stocks in the S&P 500. And even with a 61% drop in valuation from its 1999 year-end price - one of the steepest declines among S&P 500 stocks this year - Qualcomm still trades at roughly three times its 52-week low of 22 21/32.
Will the drama soon end?
Will China and Qualcomm walk off hand-in-hand into the sunset?
And will Qualcomm's stock rebound?
No one on Wall Street seems to know.
But here's one other plot twist: in May, the number of shares held by people expecting the stock to decline in value - referred to as short interest - reached a one-year low of 12.8 million, down almost 8% from 13.9 million in April. |
