Some interesting comments from the Bull Market Wireless Investor
5. QUALCOMM EXPLAINED
by Paul Tracy
We've received a lot of questions about QUALCOMM (QCOM, $61) recently and
we want to help clear things up. The stock has dropped 70% from its
52-week high of $200, leaving many investors a bit queasy. Yet we still
feel confident about Qualcomm's long-term prospects and are going to ride
this volatile stock for a bit longer.
What exactly does Qualcomm do? The company designs and manufactures
integrated circuits, intellectual property and hardware for the wireless
communications market. Essentially, they make the technology that makes
wireless communication possible. Qualcomm was one of the first to develop
what is called code division multiple access (CDMA) technology, which is
quickly becoming the standard platform used in most third-generation
wireless systems. CDMA is so powerful because it offers superior capacity
and quality, especially when compared to rival technology. As wireless
voice and data converge through the use of portable devices, CDMA is going
to emerge as the standard platform for mobile devices and Qualcomm is
going to profit from this in a big way.
Qualcomm holds more than 1,300 patents on wireless technology in North
America alone, and they're looking for more. The company will spend
roughly $300 million in R&D this year, and the vast majority of this will
be spent on CDMA-based research. Right now they have over 1,000 engineers
working on the development of wireless CDMA semiconductors and software,
which represents a far greater emphasis on R&D than most of their
competition. As they work to broaden their product line, Qualcomm hopes
to increase their market share of the content within each cellphone.
Right now the company is responsible for only 25% of the semiconductor
material within each handset, but this percentage is expected to increase
over the next several years.
Another reason we like Qualcomm is because wireless data is set to
explode. The number of cellphones in use is already at least 50% greater
than the number of PC's, but only a small portion of these phones are
connected to the Internet. This is going to change. Most phones that are
now being sold have Internet capabilities in them, and the number of
Internet-enabled phones is eventually expected to eclipse the number of
Internet-enabled PC's! This is truly a huge opportunity.
We see big upside potential here if China decides to adopt CDMA
technology. Although most wireless carriers in the country use the
European GSM standard, it looks like this might change. China Unicom
announced on Friday that its parent firm is likely to make an investment
in CDMA technology. Despite flip-flopping on the issue for several
months, we're hopeful that the company will eventually decide to adopt
this standard. If they don't, then we probably won't see a big downside
move in Qualcomm's stock (because most investors are still skeptical about
China's adoption of CDMA anyway), but if they do decide to move into CDMA,
then Qualcomm will be one of the primary beneficiaries.
The market has punished Qualcomm's stock this year, and perhaps investors
needed a breather after watching the stock soar from $7 to $176 last year.
But profit-taking aside, there are other reasons why Qualcomm is down so
much this year. For one, earnings prospects in international markets have
been dampened by poor sales in Korea. For years the government there has
subsidized the sale of wireless communications devices, making them
affordable to millions of Korean citizens. But they recently eliminated
the subsidy, causing a sharp decline in handset sales in the region. On
the surface this may not seem to be important for California-based
Qualcomm, but when you look deeply at the numbers you'll see that Korea
represents about 22% of the company's total revenues.
Another reason Qualcomm has languished is because of uncertainty
surrounding Globalstar (GSTRF, $10), a satellite phone service business
that brings in about 10-15% of Qualcomm's total sales. This is certainly
a risky business as evidenced by the bankruptcy of competitor Iridium,
which was once a high-flying tech company. The CEO of the Globalstar is a
tough cookie and their whole investment may be in jeopardy.
In addition, Qualcomm relies heavily upon its manufacturing partners.
This can add quite a bit of risk because there are many factors, such as
capacity and manufacturing cost structure, that are out of the company's
hands. Many investors don't realize that Qualcomm has no factories. You
heard us right, the company does not manufacture any of its own products.
While this gives the company greater leeway to focus all of their efforts
on R&D, it also leaves a big portion of their operating margins subject to
factors out of their control.
We feel that all of the bad news is already priced into the stock, and
those of you who are saying, "I just wish I could have jumped on this
stock last year," are getting a second chance with the stock trading below
$60. However, keep in mind that this is a highly volatile company
primarily involved in research and development. As such, any unexpected
technological shift, such as technological advances in a competing
wireless platform such as GSM, could cause this stock to move even lower.
Qualcomm will benefit from the explosion of wireless data services, and we
want to make you aware of the big risks involved in this infant industry
so that you can make your own decisions. We added this stock to our
portfolio at $6 in February of 1998, and are looking at a 12-month price
target of $90.
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
= = = = = = = = = = = = = = = = = = = = = = = = = = = = |
