Tuesday June 6, 4:32 pm Eastern Time
worldlyinvestor.com Sector of the Day
Qualcomm's Chinese Horrorscope
By Mitch Ratcliffe, Columnist
Qualcomm's latest deal with China Unicom sounds dubious, making its short-term prospects a little dim.
Qualcomm (Nasdaq:QCOM - news) has regained its footing Tuesday, rising a bit a day after reports of its China fiasco.
The more positive performance comes on the heels of a dubious announcement that it has signed an agreement outlining the conditions under which China Unicom, the second-largest telecommunications firm in China, will agree to adopt a newer version of its wireless technology. In other words, the companies have agreed on what they will disagree on.
Whether there will ever be a deal with China Unicom, also known as China United Telecommunications, is highly questionable. The important question is which way is Qualcomm heading over the longer term?
CDMA Vs. GSM
With Monday's close at 67 1/4, shares of Qualcomm are off about 70% from its early January highs of 200. Its Code Division Multiple Access technology (CDMA), which allows many wireless users to access the same frequencies simultaneously to improve network efficiency, is going head-to-head with several other wireless telephone systems, the notable competitor in China being GSM, the European standard.
China Unicom already runs a GSM network with 7 million subscribers and has decided to abandon a plan announced in February to build an alternative cellular phone network using Qualcomm's CDMA. However, today's deal on the terms of adoption for the next generation of Qualcomm technology, CDMA2000, gives the impression that China Unicom has agreed to use Qualcomm chips containing the technology. According to reports in the Chinese press, the company may adopt CDMA2000 by 2003.
The news that China Unicom has agreed to terms they will discuss, along with an announcement that Garmin, the leader in Global Positioning System products, has signed a deal with Qualcomm, helped the stock bounce upward by as much as 8%.
No Will to Build Another Network
But will China Unicom, with another two years worth of growth on its GSM network be willing to build out a competing network in 2003? The likely answer is ``no.'' The Chinese government has collaborated with Siemens (OTC:SMAWY - news) of Germany to develop another advanced CDMA technology and GSM remains a strong competitor as it is building a user base in China today.
At the same time, China Unicom yesterday announced that it has agreed to make Lucent (NYSE:LU - news) its preferred provider of technology across its network-building efforts. This could be good for Qualcomm, which has a relationship with Lucent, because it may lead to the adoption of Qualcomm-engineered chips when China Unicom rolls out next-generation wireless services.
China is just about the most important telecom market in the world and much of Qualcomm's future growth depends on success in the country. When the House of Representatives passed the Permanent Normal Trade Relations bill and made China a perpetual most-favored nation, Qualcomm's Chairman and CEO, Dr. Irwin Mark Jacobs said, ``PNTR is particularly beneficial to Qualcomm, reducing the prior uncertainty of Chinese government support for a major increase in the use of [CDMA] technology by China Unicom and possibly others.''
Losing the Battle
Note, China Unicom was the only foothold Qualcomm had in China. I don't think the future looks good, because Qualcomm is losing the battle for the fastest-growing and largest wireless market. CDMA is widely used in Korea and Japan, and has about 30 million users in the US; additionally, Qualcomm is deeply involved in the development of high-speed wireless systems. The company owns a lot of intellectual property that assures its long-term value. What it does not currently provide investors, however, is an assurance that growth will continue at or near its current levels.
Many analysts disagree with this assessment. CIBC World Markets' Dale Pfau and Earl Lum reiterated a ``strong buy'' rating on Qualcomm Monday, saying they felt the delay was due to political issues and not fundamental problems with Qualcomm's technology.
Wit Soundview analyst Matthew Hoffman, in a research note, said he had never factored the revenue from the China Unicom deal into his projections and, so, the collapse of the deal did not affect his fundamentally positive assessment of Qualcomm.
At today's price, I'd be accumulating Qualcomm but not buying aggressively. It is a core holding for a wireless portfolio, but the shorter-term prospects are not as bright as I would like. If a deal on CDMA2000 is closed, I'd be much more eager to buy for the short-term.
Ratcliffe is vice president and editor-in-chief of the <http://www.on24.com>ON24 Network,</a> a personalized financial broadcast network for individual investors. He is also longtime executive and investor in the technology industry. Ratcliffe's insights and analysis of the high-tech industry will appear twice each week. He doesn't own a position in any of the companies mentioned. Positions may change at any time.
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