What's going on with Qualcomm is all too typical given the investment mentality most
Wall Street types have traditionally brought to the table. The stock's recent collapse can
almost completely be related to some highly unnecessary, poorly-grounded uncertainty
permeating the market's opinion of the company's long-term potential. If the individuals on
the street thought and acted rationally, then this wouldn't be a problem. Unfortunately, as
intelligent as many of those who work there are, Wall Street has an irrational hatred of
uncertainty.
Let me repeat that for you. Wall Street has an irrational hatred of uncertainty. The
i-banks, brokerage houses, and asset management firms that run this nation's financial
services industry are, by and large, very stodgy and conservative. They manage billions of
dollars for some very rich clients, and the primary goal of the majority of these clients isn't
to become rich, as they already are wealthy, but to stay rich. Any good business will
always try to do its best to give its customers what they want, and most of the largest
customers of these firms seem to prefer security rather than growth. Thus analysts and
fund managers are trained to keep this in mind when making their investment-related
decisions.
Go read some interviews of prominent Wall Street tech analysts and fund managers in
which they're asked what their favorite long-term investments are. Not what their flavor
of the moment is, but rather which companies they'd really recommend holding for years
at a time. Nine times out of ten, you'll see that these have responded by naming blue-chip
techs such as Microsoft, Intel, Cisco, Oracle, and Sun. On the other hand, when a survey
was recently done on major tech companies these individuals feel that people should stay
away from if investing for the long run, high-growth firms such as Yahoo!, JDS Uniphase,
and Qualcomm were near the top of the list. Sure, the latter of the two types of
companies can have the potential to offer much higher returns for their investors over the
long run, but most of their clients don't seem to care much about this, so neither do they.
As a result, while analysts and fund managers are more than willing to recommend and
buy into volatile high-flyers from time to time, they'll only do so as long as they catch
nothing but good vibes on a given company from all sides. They'll only do so as long as the
stock's taking out old highs every other week, as long as earnings estimates are getting
shattered every quarter, as long as new product announcements, smart acquisitions, and
major contracts are the rule rather the exception for each and every month, and as long as
half of all the pundits in Forbes and talking heads on CNBC are singing the company's
praises. If these guys see something that makes them think that the given company might
not be an unblemished work of art, they'll flee from it the same way elephant flee from
mice. Not even, actually. I think an elephant would start running only if it saw a rodent
come up before it, and wouldn't do so out of fear that one might come up on the horizin,
although there's no way of knowing for sure. These guys tend not to have even have that
level of courage.
Needless to say, the big bad elephants of Wall Street are ditching Qualcomm out of fear
that, metaphorically speaking, a mouse is on the horizon; and it's nothing new for the
company. Although those that have only recently found about Qualcomm might not be
aware of it, back in 1997-1998, while its high-tech brethen soared to the heavens, the
company's stock was highly earthbound. This in spite of the fact that it was posting some
phenomenal growth. Throghout those years, its P/E kept dropping, and at one point almost
reached a ridiculous 20. Why, you might ask? Because all the pundits were worried that
the third-generation wireless standard wouldn't involve CDMA, leading the technology to
die a slow death. These people pointed to the fact that Ericsson didn't support CDMA at
all, and was actually in a heated patent dispute with Qualcomm, and that Nokia's support
was anemic at best.
The Qualcomm die-hards, both over here and at SI, knew better. They saw that although
the majority of the world had chosen GSM, CDMA was far superior to GSM in regards
wireless data communications, and thus the rest of the world, Ericsson included, would
forget about the fact that networks built on the former weren't compatible with the latter,
and would adopt CDMA for 3G anyway. I doubt that this fact was lost on most of the
power brokers who decided to shun Qualcomm. After all, there are some smart people
working on the Street (some" is an important word here). However, these people, given
the caution that they practice at all costs, decided that the huge potential return they could
attain on their investment simply wasn't worth the risk involved.
Then came the Ericsson agreement, ending the lawsuit and paving the way for CDMA to
be the protocol of choice for 3G. Soon the same people who wouldn't touch shares of
Qualcomm with the proverbial ten-foot pole couldn't get enough of the stock. By the time
that the buying frenzy in the company had reached its zenith, claims such as Walter
Pieczyk's "3 billion people each with 2 CDMA devices in 2010" (as optimistic as I am
about the company's prospects, I have to admit that prediction was quite absurd) were the
norm. Of course, even if they got in soon after the deal with Ericsson had been made,
none of these people profited as much from the stock's manic appreciation as those who
invested beforehand as a result of having the foresight to forget about near-term
squabbles, and rather focus on the long-term need for CDMA in leading-edge wireless
data solutions.
Now we're right back where we were in '97 and '98, not in terms of the price
Qualcomm's trading at (we haven't fallen that far :-) ), but in terms of the way the street's
viewing the company, and the uncertainty that's making these investors ditch shares of
Qualcomm en masse; and let me tell you, it has almost nothing to do with the repeal of
Korean handset subsidies, and it only indirectly has to deal with China Unicom's decision
to stay with GSM for now. These two things are just excuses to sell. Think about it: if the
street really believed that when 3G takes over the wireless world in a few years, that
Qualcomm would be getting significant royalties on all 3G handsets, and that its chips
would be in the majority of these handsets, do you really think that it would kill the stock
the way it has over issues such as handset subsidies and Chinese rollout postponements?
Of course not, which is why the true source of the fear and panic on the Street in regards
to Qualcom stems from a far more critical issue. So what is this issue? Well, it can be
summarized in one little acronym: W-CDMA.
As I'm sure many of you already know, the specifications for W-CDMA weren't
developed by Qualcomm, but by its good friends (sarcasm, of course) Ericsson, Nokia,
and Japanese wireless carrier NTT DoCoMo. These companies have done their best to
use their extensive clout to make W-CDMA have a lot of GSM-like attributes, and to
make it the 3G protocol of choice for the majority of the world's wireless networks; and
as much as I hate to say it, as long as these networks end up rolling out on schedule, it
looks like they're going to succeed. So now we have this renegade variant of CDMA set
to be the dominant 3G standard, a variant whose specifications weren't developed by
Qualcomm but by companies that it's often been at odds with, which means that it might
be more difficult for the company to extend its CDMA ASIC dominance (Qualcomm
makes 90% of all CDMA ASICs sold); and to top it all off, Ericsson and Nokia still
haven't signed official W-CDMA patent licensing agreements with Qualcomm, with both
companies claiming that there are significant amounts of their own intellectual property
embedded into the standard. So analysts and fund managers, in all too typical fashion, are
now doing their best to stay away from Qualcomm in the same manner that they once did;
but given the seemingly bleak circumstances, you don't expect me to blame them from
doing so, right?
Well, let's seperate fact from fiction here. Just as it would've been a smart move for
Qualcomm investors to cut through the hype generated by comments such as the one
Pieczyk made during the stock's heyday, it's important to take a cold, rational look at
W-CDMA and what it implied for Qualcomm's long-term potential.
First of all, while Ericsson and Nokia will undoubtedly get some royalties for W-CDMA,
by all accounts, it's virtually impossible for anyone, no matter how hard they might try, to
create a working commercial version of CDMA without infringing on Qualcomm's
patents. Furthermore, George Gilder's stated that NEC engineers aiding in DoCoMo's
W-CDMA rollout have confirmed to him that W-CDMA does involve the use of a large
amount of Qualcomm's intelletual property. So the company will most likely be getting
royalties on W-CDMA handset, chipset, and base station sales.
Now to handle the question of whether Qualcomm will be able to extend its CDMA ASIC
expertise into the W-CDMA market. The concern here stems from the fact that much of
the underlying protocol for W-CDMA is based on GSM, a technology that Qualcomm has
little expertise with. However, by the same token, it should be noted that for a company
that's experienced at working with CDMA to pick up on GSM than vice verca. For
example, consider how much trouble Nokia's engineers, who have proven extremely adept
at creating GSM ASICs for use in their handsets, have had in regards to creating
competitive CDMA chipsets. On the other hand, by means of their ability to
single-handedly create HDR, a time-division (i.e. similar to GSM) cellular technology,
Qualcomm's demonstrated quite well its ability to learn new tricks. Combine that with the
fact that in spite of possessing some GSM-like attributes, W-CDMA is still, as the name
implies, a CDMA variant, and you can see that although Qualcomm may face some major
challenges in the W-CDMA ASIC arena, it still has to be considered the odds-on favorite
to dominate this market, just as one had to consider CDMA the odds-on favorite to
become the preferred worldwide standard for 3G back when Qualcomm was still duking it
out with Ericsson in the courts.
As I've tried to show, all of the pessimism currently being showered upon Qualcomm is
nothing more than history repeating itself, with Wall Street's finest once again doing their
best to add fuel to the fire of needless uncertainty regarding the company's potential. It all
reminds me of a third-rate TV series where, in every episode, the protagonist ends up
facing off against the same antagonists as before, and the same dilemmas as before, with
only the context being different. It sure never looks good for the protagonist during the
middle of the episode, and he always ends up hearing a chorus of concerned people telling
him that it'll be impossible for him to succeed, all in a sad attempt to make the viewers of
the show think that this time, the good guy really won't end up winning; but in the end, the
only ones who end up duped are the ones who end up buying into that repetitive,
predictable commentary.
Eric
tsrec.com |
