Now that the beginning of the end of the Second Holy Wars is clearly in sight (with NOK's impending capitulation), I thought it might be interesting to post this piece of dreck for the record (don't think it's been posted in full yet).
tekboy@theamazingsnyderman.com
Chase H&Q
Company: QUALCOMM Inc.
Price: 70.5
Recommendation: Market Perform
Notes: a, f
Date: 6/15/00
QCOM: No Positive News in Sight: Lowering Estimates, Initiating a $50 Price Tgt
* Likely slowdown in Korea due to the recent elimination of handset subsidies
could reduce worldwide CDMA handset sales by 10-15%.
* We believe it is unlikely cdmaOne or its derivatives will ever be deployed
in China given GSM's worldwide market dominance and the technology's
significant head start in China,.
* Qualcomm's recently-announced plans to cross-license GSM technology
highlights the limitations of the company's current CDMA-only strategy.
* The likely fall of Globalstar would result in a psychological drag on
Qualcomm's shares due to its 6.4% interest in and exposure to the company
* Lowering estimates to reflect lower-than-expected CDMA handset sales, lower-
than expected chipset margins and handset royalties, and the potential impact
of Globalstar's bankruptcy.
* Reiterate Market Perform rating and establishing a 12-month price target of $50.
1999 A 2000 E 2001 E
Q1 EPS $0.08 $0.25 $0.28
Q2 EPS 0.10 0.26 0.31
Q3 EPS 0.19 0.29 0.33
Q4 EPS 0.23 0.28 0.46
FY EPS 0.60 1.07 1.27
FY REVS (M) 3,936 3,270 3,456
CY EPS 0.76 1.11 1.37
CY P/E 117x 64x 52x
FY Ends Sep Current Price $70.50
52-Week Range $15-200 Market Cap (M) $55,751
Shares Out (M) 801,338 Book Value $6.81
Net Cash/Share $2.13 3-Year EPS Growth 80%
CY01 P/E-to-Growth 65%
Estimate Changes
($US)
Q1 EPS
Q2 EPS
Q3 EPS
Q4 EPS
FY EPS
FY REVs ($ M)
CY EPS
cdmaOne handset sales in 2000 are likely to fall 10-15% short of
estimates, driven largely by a slowdown in Korea. In our opinion, the Korean
government's ban on handset subsidies will significantly retard subscriber
growth - so much so that Conexant (CNXT, $41.5, BUY) recently reduced its
forecast for Korean handset sales in 2000 from 16 million to 8 million units.
This slowdown is particularly significant for Qualcomm because about 45% of
cdmaOne handset subscribers last year were in Korea. Each lost Korean handset
sale hits the company especially hard because it not only eliminates a royalty
payment, it equates to a lost chipset sale as well (virtually all Korean OEMs
use Qualcomm's chipset).
If CDMA is ever deployed in China, revenue appears to be at least three
years away. Despite the recent approval of the Chinese trade bill, it now
appears that a cdmaOne network will not be expanded in China. We expect,
rather, that China will follow the same upgrade path to 3G as European
operators, a path that does not use Qualcomm's technology. Qualcomm's version
of CDMA is incompatible with China's current GSM networks, which are adding
well over a million subscribers per month. This incompatibility would prevent
cdmaOne subscribers from roaming on the much larger GSM system. We believe
this alone will prevent the nascent CDMA system from gaining subscribers in
China given overwhelming roaming advantages of GSM.
Qualcomm's recently-announced plans to acquire or partner with a company
possessing GSM capabilities highlights the limitations of Qualcomm's current
CDMA-only strategy. Yesterday, Qualcomm announced plans to develop a "dual
mode" CDMA-GSM chip that would allow Qualcomm to sell into GSM, which is about
55% of the world market. While such strategy was inevitable given CDMA's
relatively small share of worldwide subscribers, it will require that the
company cross license technology from existing GSM OEMs. Cross licenses will
likely decrease margins on Qualcomm's chipsets and dilute the value of
Qualcomm's royalty stream.
Due to its 6.4% interest in Globalstar (GSTRF, $7.25, NR), its fall
would result in a psychological drag on Qualcomm's shares. The situation at
Globalstar (the only remaining satellite phone company that has not filed for
bankruptcy) is eerily reminiscent of Iridium's demise earlier this year.
Market psychology aside, Qualcomm has both production and financial exposure
to Globalstar as well.
*
*Production Exposure. Qualcomm has entered into a number of development
and manufacturing contracts with Globalstar to develop the gateways and
handsets for the Globastar system. This agreement resulted in approximately
$430 million in revenue for Qualcomm in FY 1999 (46% of wireless systems
sector (QWS) sales).
*Financial Exposure. As of March 26, 2000, Qualcomm had $621 million in
receivables from Gloabalstar. In May, Qualcomm replaced a $100 million vendor
financing commitment to Globalstar with a $500 commitment, of which $482
million was outstanding as of May 5. This implies a total financial exposure
to Globalstar of approximately $1 billion.
Valuation
Lowering estimates to reflect lower-than-expected CDMA handset sales, lower-
than expected chipset margins and handset royalties, and the impact of
Globalstar's likely bankruptcy. Qualcomm is currently trading at $70.50, or
51.4 times our estimated 2001 earnings. This is a 42% premium to a group of
comparable semiconductor companies. We believe this premium is not justified
given the company's deteriorating long-term prospects and lack of short-term
catalysts. Qualcomm would be trade in-line with its comparables at $50 stock
price. We are therefore lowering our estimates and initiating a 12-month
price target of $50 and reiterating our MARKET PERFORM rating. |
