Qualcomm Cavalry Lacking Ammo
By Aaron L. Task
Senior Writer
6/21/00 3:36 PM ET
NEW YORK -- In the wake of last week's implosion, several Qualcomm (QCOM:Nasdaq - news - boards) bulls have come forward to defend the stock.
No shock there, but some of the issues are worth exploring further because there's apparently still some confusion and debate about what transpired.
One reader chastised me for being "so clearly wrong on a verifiable fact" in my reporting that CFO Anthony Thornley said at a Bear Stearns conference that the failure of Globalstar Telecommunications (GSTRF:Nasdaq - news - boards) could trim as much as 10 cents per share off Qualcomm's earnings in fiscal 2001.
The reader pointed to a report by Salomon Smith Barney's retail strategy team -- posted by a client on ClearStation.com -- which said investors were "confused" and that Thornley "was referring to possible earnings upside and not a potential 10 cent shortfall." I checked with Solly, and the report is for real.
A Qualcomm spokeswoman declined to comment, referring me instead to a Dow Jones wire service story from last week, which said: "In response to a question, Thornley said if Globalstar fails, it could have a 10 cent a share impact."
If that's not clear enough, Bear Stearns analyst Wojtek Uzdelewicz said there should be no misunderstanding about what Thornley said (or didn't say).
"He was very explicit," Uzdelewicz recalled. "The question was simple: 'In terms of [earnings] guidance going forward in 2001, if Globalstar were to fail, what would be the impact?' He came back and said explicitly it would be 10 cents."
As was widely reported, the analyst lowered fiscal 2001 earning estimates for Qualcomm by a dime (coincidence?) to $1.30 last week, and maintained an attractive recommendation. Bear Stearns has done underwriting for the company.
Uzdelewicz noted that Qualcomm started selling off even before his note was released, suggesting that almost everyone else in attendance (save Solly, I guess) was clear on Thornley's message.
Additionally, the importance of Thornley's comments went beyond any specific guidance regarding Globalstar, the analyst said. That's significant considering the satellite company said earlier this week that it is confident it can raise the requisite cash to continue its operations.
"The bottom line is, I think, the CFO was trying to send a message [that] they're a little concerned about the outlook," Uzdelewicz said, noting that Thornely also made cautionary comments regarding Korea and China.
The analyst wouldn't say so, but inferred Thornley might have used the potential Globalstar troubles as an excuse to help douse broader expectations.
"He's communicating to us that there are some issues with business on the margin," Uzdelewicz said. "Clearly there are three big risks. Chances are more than 50% one will materialize."
Conversely, a fund manager who has a long-standing position in Qualcomm (who requested anonymity) said "the short-term crap doesn't bother me," and maintains a bullish long-term outlook.
"There are serious businesses developing high-quality [products] and it's being done on CDMA," he said, predicting he'll soon have laptop, phone, and PDA each enabled by a Qualcomm chipset.
Amid the maelstrom last week, a "major" development for Qualcomm slipped many investors' attention, he said.
Specifically, the $1.5 billion agreement between Verizon Wireless and Lucent (LU:NYSE - news - boards), which sets the stage for Qualcomm's next-generation (3G) code division multiple access (CDMA) digital wireless technology, is to be incorporated into Verizon's wireless network. Verizon has about 17 million wireless phone subscribers, a figure expected to grow to about 24 million once Bell Atlantic (BEL:NYSE - news - boards) and GTE (GTE:NYSE - news - boards) finalize their merger. (Verizon was created out of the wireless operations of Bell Atlantic, GTE and Vodafone AirTouch (VOD:NYSE - news - boards).)
Given that Sprint PCS (PCS:NYSE - news - boards) is aiming for a 2001 commercial rollout of a wireless network based on Qualcomm's 3G CDMA, the fund manager takes comfort in knowing that two of the four biggest wireless carriers in the U.S. are committed to using Qualcomm technology.
Uzdelewicz did not dispute that, but called the Verizon-Lucent deal more of a win for Lucent than for Qualcomm. Essentially, Verizon long ago committed to using Qualcomm equipment, and the deal last week merely formalized its decision to use Lucent as its infrastructure provider rather than rivals such as Motorola (MOT:NYSE - news - boards).
While Uzdelewicz expressed surprise at the stock's wicked decline, given the issues dubbed responsible were "fairly well-known," he noted that Qualcomm still trades with a forward price-to-earnings ratio of around 50 times, roughly in line with that of its peer group.
Asked about the relatively modest 1.5 P/E to growth (or PEG) ratio, "one of the problems is when things start to go wrong, you almost never see the first [earnings] cut to be the last," he said. "That's the risk: Catching a story that's starting to break down."
Notably, most other major firms reiterated their estimates and/or recommendations on the stock last week, save Chase H&Q, which cut its estimates and put on a target of 50.
Uzdelewicz did not put a price target on Qualcomm stock, but predicted that Chase H&Q's Edward Snyder "might end up looking right on it."
Nevertheless, Qualcomm rose as high as 67 1/2 Wednesday before closing up 1.5% to 64. 1/2.
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