Qualcomm
thetelecommanalyst.com.
A Case of the Asian Flu
By Marc H. Gerstein
Market Guide, Director of Investment Products
It seems like only yesterday that QUALCOMM (QCOM), which
makes equipment and earns licensing fees based on its
proprietary CDMA (code-division multiple access) wireless standard, was the poster
child for the new economy's wild stock market rally. Toward the end of 1999, the
stock performed so spectacularly that it made investors out of those who didn't even
understand the company's business. The first half of 2000 has been less kind to the
stock, which became a symbol of excessive Nasdaq valuations and well-deserved
corrections.
With all the attention focused, for better or worse, on the stock's roller coaster ride, it's
easy to lose sight of the fact that this is a financially strong company that scores well
in terms of growth, return on equity, operating margin, and employee productivity.
Meanwhile, the stock's recent tumble brought the PEG ratio to about 2.00, based on
a P/E using estimated fiscal 2001 earnings. That's definitely not a bargain, but it's
reasonable compared with PEG ratios of other marquee new-economy companies.
But before pouring your life savings into QUALCOMM, you need to consider that Wall
Street has lately wrestling with two fundamental concerns that amount to a case of
Asian flu for the company. In Korea, the government terminated subsidies for cell
phone handsets. With service providers no longer able to absorb the cost of phones,
consumers, facing higher costs, may be less likely to upgrade. New accounts aren't
much of an issue in Korea, since the market is already heavily penetrated. China
disappointed many QUALCOMM bulls by deciding not to adopt the CDMA standard
right now.
Analysts claim to have factored these events into their forecasts, and therefore,
QUALCOMM may meet the Street's current expectations. But it's hard to reliably
quantify things like this, so investors have to be alert to the possibility of a negative
earnings surprise in the near future.
It's never fun to have the flu; in fact, it feels downright awful. But however bad the flu
may be, generally healthy people cope with it, get passed it, and after a short time,
it's like the flu never happened. QUALCOMM's Asian flu scenario may chart a similar
course.
QUALCOMM's CDMA standard is clearly superior to rivals TDMA (time-division
multiple access, used in the U.S.) and GSM (global system for mobile
communication, used in Europe). CDMA uses the communication spectrum more
efficiently than either of the alternative standards. After having progressed from
analog to digital, wireless is now edging into the third generation (3G) that will
prominently feature Internet data transmission. Unless some bold new technology
suddenly appears, it seems like 3G will amount to a high-bandwidth version of
CDMA.
That means when 3G is entrenched, QUALCOMM will be getting royalties from pretty
much everyone, as opposed to only getting some of the pie in 2G wireless. It also
means that later, if not sooner, Korean consumers and Chinese service providers are
going to have to get on the CDMA bandwagon. Correction: Maybe they'll sit back and
let wireless Internet technology go forward without their involvement and permanently
avoid CDMA. And maybe we'll all go back to black-and-white TV |
