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Qualcomm: Facing A Great Wall In China
By Heidi Schumacher
Qualcomm faces uncertainty in China, the end of phone subsidies in South Korea and holds a minority stake in the
floundering
satellite company, Globalstar Telecommunications Ltd. So that may explain the wild ride the company’s stock has
taken.
After Chase H&Q analyst Edward Snyder stated that Qualcomm had no positive news in sight and set a target
price of $50,
the stock promptly fell more than nine points. It then bounced around in the low to mid-$60s until rumors of a
Nokia buyout
sent it flying briefly to $74 on June 23. The high didn’t last though and the stock settled back into the low to
mid-$60s last
week–a far cry from the January high of $200 and analysts’ predictions that it would reach $250. But whether the
stock will hit
the wall or climb over it remains to be seen.
In classic tech-stock style, the CDMA chipmaker has been a textbook example of market volatility. But for all the
recent
bouncing around, a number of analysts still say Qualcomm and its CDMA technology have a strong hold in the
marketplace,
even without China.
Although analysts quickly dismissed the Nokia-Qualcomm buyout rumors, a partnership between the two may not
be that
far-fetched. The same day rumors flew, Nokia announced an agreement with South Korea’s Telson
Electronics–which has a
licensing agreement with Qualcomm–to develop Nokia handsets for the South Korean market that would use
Qualcomm
CDMA chipsets.
A Nokia spokeswoman says the move is a temporary solution to enable Nokia to quickly enter that market, and
the Finnish
company will continue to develop its own CDMA chip, particularly for use in next-generation handsets.
Nevertheless, Qualcomm says the agreement is positive and will further CDMA in the South Korean market, where
Qualcomm
expects lower chipset orders in the fourth quarter.
That’s not to say doubts about CDMA don’t exist. “All the trends that pushed the stock up last fall–worldwide
domination for
CDMA and royalties–have all disappeared in our opinion in first quarter of this year,” Snyder says, whose lowered
earnings
expectations came on the heels of fiscal earnings cuts by Bear Stearns & Co. analyst Wotjek Uzdelewicz. Both
cited similar
reasons for the cuts.
Snyder points to the recent decision by China United Telecommunications, the country’s second largest phone
company, to
delay the building of a CDMA network as an indication of what’s to come. He says the pressure on carriers is to go
with
wideband-CDMA because it is the most logical third-generation step from GSM, the world’s most prevalent
network.
While Snyder says cdma2000 probably will come to fruition, it will not be the widespread standard. The reason is,
while
CDMA has a strong foothold in the United States, Latin America and South Korea, GSM is firmly entrenched in
Europe and
elsewhere. That being the case, Snyder sees no reason why China would adopt cdma-2000, particularly since
GSM already is
so prevalent throughout the country. Instead, W-CDMA would be the logical next step. If that happens, Snyder
says,
Qualcomm’s royalty revenue would be substantially less than it was with the original CDMA technology.
Qualcomm is quick to point out, however, that it still has the framework agreement with China Unicom, and the
chip maker has
inked deals with eight Chinese manufacturers to develop CDMA handsets and base station prototypes for IS-95
and 3G 1X
multicarrier standards.
Industry analyst Ira Brodsky, president of Datacomm Research, says there is no indication that China Unicom
won’t build a
CDMA network and the operator appears to be going straight to cdma2000 and skipping cdma-One all together.
He believes
China Unicom delayed the network because Qualcomm hadn’t lined up enough domestic manufacturers–a problem
he says has
been solved with the recent eight deals.
Even without China, Qualcomm has a substantial presence in Latin America, where Brian Modoff, analyst for
Deutsche Banc
Alex. Brown, wrote in his recent report that increased sales could potentially offset any declines in South Korea.
The May
government ruling that service providers must end subsidies has created speculation that the South Korean CDMA
market may
lose ground. Modoff contends the ban won’t last and even if it does, carriers will work around it by using
interest-free loans
and lower airtime charges, as they have in the past. Modoff forecasts that 4.6 million unit shipments will be sent into
Korea in
the fourth quarter. His current revenue and earnings forecasts for that quarter are $815 million, or 30 cents per
share, and even
an aggressive decline to only 1 million units shipped would result in only a 5-cent per share drop.
In the United States, Qualcomm is unlikely to lose market share with the two fastest growing carriers–Verizon
Wireless and
Sprint PCS–using CDMA. “They believe they’ve picked the best technology to support growing networks,” says
Ken Hyers,
analyst for Cahners In-Stat Group, which has the same parent as Wireless Week. And he doesn’t think that carriers
will change
networks with 3G.
But there’s no denying that GSM controls the worldwide market, and there is little reason for GSM carriers to
move to
cdma2000 rather than W-CDMA. When it comes to customers, global roaming capabilities and coverage will
remain
important.
That realization may have prompted Qualcomm’s recent announcements regarding GSM. Subsidiary SnapTrack
Inc.
announced an international consortium of GSM carriers will test its wireless location technology’s ability to provide
network-to-network roaming.
Qualcomm also plans to support a Removable User Identity Module that would be used with the company’s mobile
station
modem chipset to enable roaming between the United States and Europe/Asia. The R-UIM card also could be
used in 3G
networks.
The R-UIM is the subscriber identity module card of the GSM world. It stores a subscriber’s identity information,
which can
be transferred between handsets. The good news is that it allows for international roaming on IS-95 and GSM
networks, and
all calls, whether CDMA or GSM, are billed by the subscriber’s carrier. The drawback is that a user needs more
than one
handset.
The link between GSM and CDMA may get tighter. Modoff says his firm believes Qualcomm will team up with a
GSM carrier
to develop a dual-mode chipset that would support roaming across disparate networks.
Analysts agree it would be a necessary move. “I think Qualcomm is reaching the conclusion that we will have to live
together,”
Hyers says. “They have to take a realistic view of the wireless landscape and what the future will hold.”
Snyder compares the situation to a handset manufacturer who continues to make only analog phones–no one would
buy them.
And what customers will pay for is the key. “For international roaming, you have to have dual-technology phones,”
he says.
While analysts agree that international roaming will be a must in the future, the general consensus seems to be that
Qualcomm is
doing all right. According to Zacks Investment Research, Qualcomm still is rated a “strong buy” or “buy” by the
majority of
analysts.
If investors agree, Qualcomm’s stock may climb right over the wall. |
