From Ruffian on QCOM:
Coming into Buying Rnge
From: Ruffian Saturday, Sep 9, 2000 11:44 PM ET
Reply # of 80779
Posts To Remember When (If) Qualcomm
Trends Sideways, Or Lower
..... Something to think about... Anyone that gets so nervous that they cannot wait to sell should reconsider their fortitude for
investing. If you look at any of the huge moneymaking stock market stories over the last five years and you wonder - boy it was
so easy - just invest $100 in Dell and take out $750,000 five years later - why couldn't I have gotten in on that?
The answer is you could have, but most people are too blind, too squeamish, too quick to panic, too quick to take short-term
profits, too near-sighted to envision the true magnitude of the "down the road" potential, too easily excited by "positive posts"
while at the same time too easily vexed by the "negative ones" to realize what they have in front of them until it's gone. There are
no "sure things" but some are closer than others. Many of the most successful investors wear "blinders", earplugs, whatever it
takes to remove themselves from the daily grind of pessimism and the weekly/monthly grind of volatile stock swings as they go
by their instincts. Study any of the most successful stocks over the last 3 years and chart what was being said about them "then"
and how investors were reacting to those words "then" and compare that to where they are "now." and you will see some
startling contrasts.
A perfect example is AOL. (Yes, we all realize that the Internet sector has been sagging as of late, but regardless of that, an
investment in AOL 2-3 years ago would still be worth major bucks today after 6 stock splits.) Look at the history of AOL's
last 3 years and you will be amazed at the moments of pessimism and stock downturns. Most of the daily followers of AOL
that bought in 3 years ago were scared out 1 to 2 years ago. It sounds hard to believe but there were many times that you
could have read AOL's obituary. I know, because before I started investing in the stock market, I said to myself - AOL -
wow, it was (is) so easy to make money - everybody should be rich but their not. -Why? - So I went back and read every
article in "The Street.Com's" archives and looked up countless prior news and commentaries on AOL at various news sites to
understand and help me gain the "confidence to relax."
The answer is that throughout any company's path to success there are many moments of anxiety, moments of doubt, moments
requiring great patience and moment's that invoke. "Murphy's 3rd Corollary of Stock Investing" which states: "All stocks
experience downturns just long enough to induce you to sell on the morning of the day that it rebounds." And also. "Murphy's
2nd Postulate of psychological Market Parameters" (commonly referred to as M2PPMP) which indicates that: "For every
piece of good news that invokes you to buy there will be two pieces of follow-up commentary that will convince you to sell too
soon." So who made out the best in AOL (even with its currently depressed price?)
Certainly not the M2PPMP crowd, but the investors that wore their blinders. I'm content to put my blinders on. But alas, in the
end, every-one has to make their own decision based upon their own lives. But if a few weeks or a few downturns is all that it
takes to scare you out of what may potentially be the Stock that will change your life then so be it, fall victim to M2PPMP and
be content in the fact that you can still live vicariously through the rest of us willing to go the distance and reap the rewards
The Rich Janitor Posts To A Weak Kneed, Scared Money "Newbie" Investor
Please sell. I have watched other stocks go up, as well. I have watched many things in the last year, but my timetable has never
been as short as yours. When QCOM goes up 5, 10, 15 or 25 and the NAS goes down, I don't hear people crying. If you are
looking for stocks that share the same trend as the overall market or indexes, I suggest a Vanguard index funds. If you have
another stock that you KNOW will double in the next month, please buy it and let the rest of us know what it is.
If your investment window is 30-60 days, I suggest selling QCOM because not one person here will guarantee a double in that
timeframe. If your year 2000 investment strategy is to increase your money by 10 fold, sell QCOM now! If you understand the
wireless industry and QCOM's role, then why do you care about QCOM's daily movement?
Here is a true story: Last year there where about 3-4 periods of declining and stagnant price in QCOM. It would drop 20% in
a day and stay still for 3-5 weeks. This guy I know understood the fundamental of the company and bought huge amounts of
shares. He sold many good performing stocks and he margined himself heavily (he could afford it and he was never close to a
position where he would HAVE to sell) to buy more QCOM. You see this guy understood the importance of time. When
QCOM would go down, he saw it as a buying opportunity. He wanted to accumulate as many shares as he could by a certain
date.
If QCOM went up, he was happy. If QCOM went down, it was a great excuse to add to his position. If QCOM stayed flat,
he went golfing. He never worried because he unbderstood the fundamentals and he understood the market. At the end of the
year, that man was (by many peoples standards) extremely wealthy. Some might even say rich.
That same person told me the other day that his strategy for 2000 was the same. Nothing had changed in the fundamentals of
QCOM and he believed that time was his friend, not his enemy. He believed that accumulating QCOM was still the best (and
safest) investment strategy out there. He understands the name of the game when a Gorilla is in its infancy.
OOYF: No offense, but you are making the most common mistake of young or inexperienced investors: You don't have a plan.
Without a plan, you are hoping and most likely developing an ulcer. Develop a strategy, a plan and set short and long term
goals. Define a realistic method for evaluating your plan and review the results - make changes as needed. But, have a plan!
There are three kinds of investors:
1. Investors who get rich
2. Investors who enjoy a nice upper middle class lifestyle
3. People who jump off buildings
To belong to 1 or 2, you need a plan.
JMO, -TRJ
Possible Valuation For Qualcomm
The cellular communications industry is often looked at in terms of "generations" of service deployment. First-generation
wireless communications was marked by the coming of analog cellular telephony during the 1980s. Then, during the
mid-1990s, 2nd-generation (2G) wireless communications services, better known as digital wireless, began to proliferate. As
digital services evolved, based primarily on networks and handsets using one of three competing protocols, GSM, TDMA, and
CDMA, costs decreased, the quality of voice transmissions increased, and new value-added services, such as caller ID and
two-way paging, were allowed. However, although CDMA offered some incremental benefits when compared to GSM and
TDMA in terms of voice quality and cost, both a result of its more efficient use of frequency spectrum,the difference wasn’t
large enough to have any effect upon either the purchasing decisions of many carriers that offered wireless services, and only
had a minor effect on the wireless users who were given the option to choose between two carriers each offering services
based on a different protocol, as there was usually more than enough spectrum to go around in many regions.
Meanwhile, since GSM and TDMA had greater support among international standards bodies and equipment manufacturers,
and since Europe, the region with the highest penetration rate for wireless subscribers, had chosen to shun all protocols save
GSM, going into 2000, only about 10% of all worldwide wireless subscribers used a CDMA handset.
However, this is set to change, as the cellular communications industry now makes the transition to third-generation (3G)
services which will allow both far cheaper digital voice communications and a whole slew of services such as the following:
1. Spectrum usage efficient to the point that wireless voice services can be offered at prices low enough to convince millions of
individuals, especially those not living in North America, in places where local calls cost money, to give up using their fixed-line
telephony services altogether.
2. Advanced personal digital assistant (PDA) software on a handset (i.e. calendar management, phone and e-mail lists, etc.),
and the ability to synchronize such software with information uploaded onto the internet via a PC.
3. High-speed internet access, giving carriers the ability to provide subscribers content such as news, weather reports, and
streaming video, as well as services such as e-mail, instant messaging, videoconferencing, online trading, and corporate
database access.
4. High-speed communications between devices in close proximity to each other via an open standards protocol known as
Bluetooth, allowing these devices to exchange vast amounts of information in a convenient manner.
5. The installation of chips allowing cellular data communications on devices other than wireless phones. Such devices include,
but aren’t limited to, PCs, PDAs, laptops, handheld video game consoles, digital cameras, and automobiles. Unlike 2G voice
services, 3G data services based on competing protocols won’t be equal, with the inequality favoring those offered via CDMA.
Since a data packet can take up 50x as much spectrum as a voice transmission, the issue of efficient spectrum management
matters tremendously in regards to affecting the cost of the data services provided by a given carrier. In this regards, not only
will 3G variants of CDMA, known as W-CDMA, cdma2000, and HDR (technically, HDR's not a 3G service, as it can be
used to provide 3G-quality data services alongside 2G voice services), allow data to be transferred at a fraction of the cost of
their GSM and TDMA competitors due to their ability to send a data packet using as little as 1/9 as much frequency spectrum
as their rivals, they’ll also able to do so at much higher speeds (2 mbps for W-CDMA and cdma2000, and 2.4 mbps for HDR,
the latter of which expected to be available by 2001, as compared to 384 kbps for GSM and TDMA, set to come to market in
2002).
As a result, CDMA has been accepted by all major wireless standards committees, European ones included, as the
cornerstone for the deployment of 3rd-generation wireless communications services, and it’s very possible that within several
years, the percentage of wireless subscribers using a CDMA-based service may be five to six times higher than the percentage
doing so at this moment.
No company stands to profit more from the coming boom in 3rd-generation CDMA services than Qualcomm. Through dozens
of patents the company filed during the early 1990s, it’s literally impossible for any company to create a CDMA-based product
without first obtaining a licensing agreement from Qualcomm. Taking advantage of these patents, Qualcomm requires that any
company that wishes to sell either CDMA handsets or the chips that functions as the microprocessors for these handsets,
known as a CDMA ASICs, pay them royalties based on a percentage of the price of the handsets and ASICs they sell. The
actual percentage Qualcomm collects in royalties from handset and ASIC manufacturers varies per licensing agreement,
although the company’s stated that on average, its fees are between 2.5%-5.5%.
These royalties generate a stream of nearly pure pre-tax profit of anywhere from $3-$15 per each of the millions of CDMA
handsets sold. Qualcomm has also been able to utilize its tremendous expertise in working with CDMA to become the
undisputed leader in the market for CDMA ASICs. Currently, Qualcomm’s latest chip, the MSM 3100, offers significant
advantages over the offerings of competitors such as LSI Logic and DSP Communications (acquired by Intel) in terms of
processing power, data transfer speeds (64 kbps as compared to 14.4 kbps for competitors), power consumption, and the
amount of voice traffic that can be handled over a given amount of frequency spectrum.
It’s expected that competitors won’t be able to catch up to the MSM 3100 until 2001, and by then Qualcomm is set to release
the MSM 5000, which contains a dual-processor architecture for greatly increased computing capabilities, and will be the first
chip to allow full-fledged 3G voice and HDR data services. Qualcomm’s lead in the CDMA ASIC market, which it now
controls over 90% of, has grown so large that even Motorola, which was previously determined to develop its own CDMA
ASICs for its handsets, is now buying from them. Nokia is now the only major handset manufacturer still using in-house
CDMA chip designs, and by the end of 2000, Qualcomm believes that they may be a ASIC customer as well.
Furthermore, through its CSM line, Qualcomm also dominates that market for chips used in CDMA base stations, although the
size of this market is only a small fraction of the size of the market for Qualcomm's MSM chips. In 1999, roughly 40 million
CDMA handsets were sold, an increase of nearly 200% from 1998. This compares to handset growth of only 70% for the
entire wireless communications industry. Qualcomm CEO Irwin Jacobs has estimated that CDMA handset shipments will rise
by 75% in 2000 to 70 million, but also stated that this number may prove conservative.
Considering that total cellular handset shipments are still expected to rise by 60% in 2000, that CDMA is taking considerable
market share in every region where it’s been allowed to compete (North America, South America, Japan, South Korea,
Australia, and now China), and that the boom in CDMA-based wireless data services will show its first effects via 64 kbps
internet connections, to call that number conservative is a major understatement. A much more rational estimate would be for
handset sales to double to 80 million, although this number may also prove to be too low. In Q4 ’99, roughly 16 million CDMA
handsets were sold. Had Qualcomm been able to collect royalties not only for handsets sold by third parties, but for those
produced by their handset division, something they’ll be able to do in 2000 as a result of the sale of the division to Kyocera,
assuming a 38% tax rate, which is what they’re set to pay in 2000, the company would’ve generated $110.4 million in profits
from royalties.
Based on this number, assuming that 80 million handsets are sold in 2000, and assuming that handset ASPs drop by 10%,
leading to a proportionate drop in royalty fees, Qualcomm’s 2000 post-tax royalty profits will total $552 million. Meanwhile,
the average selling price for the company’s ASICs during this quarter was $23.65, down from over $30 in the year-ago period.
ASIC ASPs are expected to drop again in 2000, but by 15% at the most, and in spite of the drop, pre-tax profit margins on
chips are expected to rise from their current rate of 36%.
Assuming that a 15% drop in ASPs takes place, that the division’s profit margin rises to 40%, and that 72 million, or 90% of all
CDMA handsets that I estimate to be sold next year use Qualcomm’s ASICs, this division will bring in another $359 million in
post-tax profits. If base station ASIC sales account for 3% of handset chip sales, this will add another $10.8 million in profits.
The company should also see gains from the sale of systems and design software which, based on Q4 ’99 numbers and 2000
chipset sales estimates, should bring in an additional $16 million in profits.
Finally, assuming that the company’s other businesses, the largest of which are its OmniTracs truck fleet management
equipment and Eudora e-mail software, which combined grew roughly 30% annually last year, grow profits on average by
5.5% sequentially (23% annually) each quarter from Q4 ‘99, these businesses will add $188 million in profits. Combining the
estimated 2000 profits for all of these businesses results in an estimated net income for Qualcomm of $1.13 billion in 2000.
It's very likely that CDMA handset sales will rise at least 87.5% from 80 million to 150 million in 2001, still a conservative
estimate given that 3G and HDR services will first begin to be offered this year, leading subscribers to begin upgrading their
phones at a faster pace than before. It’s also very likely that both handset and ASIC ASPs will rise in 2001 due to the
complexity of the MSM 5000, and due to the likelihood that consumers will purchase more expensive handsets in order to
have advanced internet/PDA features, but just to be safe, for now I’ll assume that all ASPs remain flat.
Based on these estimates, assuming that profit margins rise slightly due to increased operating efficiencies, partially offset by
slower growth in the company’s OmniTracs and Eudora businesses, Qualcomm should earn $2.1 billion in post-tax profits in
2001. This estimate is assuming that licensing fees generated by the sale of equipment related to HDR, which is set to be used
to provide internet services on PDAs, laptops, and PCs as well as cell phones, will have no effect on its bottom line in 2001, a
prediction that has a good chance of not holding up.
At the end of 2000, Qualcomm will be valued based on 2001 estimates. Assuming that Qualcomm’s expected growth rate for
the next several years will be 70% by then, and factoring in the potential of a market correction resulting in valuations coming
down slightly, it would make sense to set a year-end price target for Qualcomm based on 110x its estimated 2001 earnings.
Amazingly, doing so shows that even after the unbelievable run-up it’s had, shares of Qualcomm are still relatively undervalued
when compared to other marquee tech issues, for if Qualcomm were to trade at 110x my 2001 earnings estimate of $2.1 billion
by year’s end, it would then be worth $231 billion, or $324/share.
This may only be he beginning. It's estimated that by 2004, roughly one billion handsets will be sold. With the possibility that
60-70% of them could be based on CDMA, and that handset ASPs may be much higher than today, as cell phones begin
acting acting as the portable, handheld computers futurists have been envisioning for decades, Qualcomm could easily become
the world's most valuable company just from profits stemming from its cell phone-related businesses.
Of course, there's much more to Qualcomm than this: over the long run, millions of laptops, automobiles, PCs (in areas where
cable modem services won't be available), and even watches will have CDMA chips generating a steady stream of profis for
the company. The wireless data communications/computing industry at this moment, in its early, immature form, looks much like
the PC industry during the mid-to-late '80s, the time when the device was first beginning to proliferate into the consumer
market. By having a monopolistic position regarding the ownership of the designs needed to make these wireless devices run,
and by dominating the market for the chips that power these devices not via any monopolistic power, but through sheer
engineering expertise, Qualcomm doesn't remind me of a young version one of the two companies that have come to embody
the PC industry as we currently know it, but both of them rolled into one. Note: This recommendation will probably be
replaced at some point the future. Also, as with my other write-ups in which I estimate a company's future earnings and set
year-end share prices, for me to call these estimates anything other than crude would make me a politician.
From The Motley Fool...
Just beautiful, Jeff. I pretty much skipped the past few hundred posts anyway due to my schedule, so I don't know who your
digression was aimed. However, I can imagine. There will always be those in the financial media, financial industry and of
course on message boards like this that attempt to use the power of persuasion to create the maximum amount of FUD (fear,
uncertainty and diddly doodly little doubt) to make one rethink our investments. In the scheme of gorilla gaming, one learns to
avoid the 'noise'. Choose your gorilla, invest and simply live life while the gorilla does what it does best. Skim the news from
time to time, but realize that the majority of it is simply noise. The FUD is even more distracting than the 'noise'. You'll hear
valuation concerns, interest rate concerns, TA chart moving average concerns, economic concerns, blah, blah, blah.....ad
naseum. Buy the investment, pack it away and let it grow. Do you think investors in Cisco back in early 1990 have a 178,000+
% return by listening to all the FUD along the way and pushing the panic button? Nope. They bought, hold and didn't listen to
the 'noise'. Then there was that poster that told us all to sell Qualcomm and buy Oak something or other a few months ago? I
was searching for that post last night in the January/February time frame, but couldn't find it. After you invest in great
companies, invest in some ear plugs or some good noise filters....
Earnings Trends...Via TRJ
The growth rate of CDMA is phenomenal to say the least. Sticking with only the current cdmaOne and cdma2000 path is a
goldmine for QCOM and will allow QCOM to continue its earnings growth by 50%+ a year for the next 5 years. Remember
that? It was simple. As long as Q grows by 50%+ a year, we wre golden. The percentage was actually conservative. CDMA
growth is expected to be larger and with the addition of replacement pohones that Nokia suggests equals 40% of existing
subscribers per year, Q's actual growth could be as high as 80-100% per year for the next 5 years. Does this include
WCDMA and or China? Absolutely not! Some facts that pertain ONLY to our current factual path: 1. In FY99, QCOM
reported earnings of .60/share (adjusted for split). After 2 quarters, we have earned .52/share with 2 of our strongest quarters
left to go. 2. From calander perspective, at the end of 1999 there were 50M CDMA subs. After Q1, there were ca 58M subs.
Conservative estimates place CDMA subs at end of 2000 at 85M +. This does not include China. Now, remember Nokia's
replacement phone percentage of 40%/year? 3. ALL existing cdmaOne networks are currently being upgraded to cdma2000
networks meaning that any WCDMA developments will have NO negative effect on current cdmaOne/cdma2000 growth
rates. 4. Competition. What a joke. What don't the analyst understand here. This isn't plantlife. If you are years late shipping a
product that the competitor (QCOM) had years ago, then chances are that the new products the the competitor is shipping is
light years ahead of the old product you have yet to ship. We are now deep into April and the chip competition is still
discussed? QCOM is shipping their 3100 MSMs and all the competitors mention have yet to ship products equivalent to the
MSM2300 (2 generations or 2 years ago). Where are the volume shipments? Can someone name one customer that does
volumes over 50K units outside of Nokia that is not using QCOM chips? I guess MOT uses their own chips although a
majority of their phones use Q MSMs. Not one!! Not even a small guy. And don't show me any damn press announcements.
You have to be able to open the phone or device up and see a physical chip. So now, when and if the competition ever comes
out with a working chip, it will be priced and performance compatiable with a chip that QCOM doesn't even ship anymore.
Yeah, reason to worry. So understanding these FACTS and understanding that none of the above includes WCDMA, China,
NOK buying chips, India, Europe, AT&T or any other rumor that people choose to make a big deal ot of, explain to me why
QCOM is so cheap.
Yes, cheap. We agree that our growth rate on the facts alone is greater than 50% a year for several years to come and more.
Using Year 2000 EPS, our P/E is under 100. CSCO is allowed to trade at a 140 P/E with only 30% growth a year. Cisco has
earnings of 3x more than QCOM, yet a market cap 6x more than QCOM. Additionally, QCOM earnings are growing at a
much faster pace than CSCO earnings were two years ago. So how do you value QCOM? Compared to CSCO and other
high flyers, QCOM is cheap at current multiples. ESPECIALLY considering their sustainable high EPS growth rate. Well, even
QCOM's biggest adversaries iun the finicial world admit that QCOM will earn $1B in royalties in 2001. Conservative estimates
also predict 100M ASICs in 2001. This means that QCOM will earn between $2.2 - 2.5B in 2001. So, if our 2001 P/E is <
50 and our growth rate is 50%/year, what should today's value reflect? Easy: With 50% sustainable growth per year, you have
to use a fwd year P/E of 100+. 4/2000 = $145/shr 1/2001 = $250/shr 1/2002 = $425/shr Now the question of added value
comes into play. Considering the following scenarios, what added value, in terms of percentage gain, does each contribute to
QCOM's stock price: 1. China 2. Q selling WCDMA chipset 3. Q recieves royalty for WCDMA phones made (we already
know this is fact, but don't know exact amount. 4. Nokia buys MSMs or licenses MSM core technology. 5. AT&T invests in a
CDMA network 6. More countries deploy CDMA networks 7. Today's wired devices go wireless (internet, etc.) My point is
that QCOM has a value based on typical CDMA growth. This is a very low risk earnings path that today is undervalued. It has
a different value based on all the potential positive changes that can effect its revenue, earnings, and market share in the future.
Either way, you would be hardpressed to find investment opportunities with so little risk and so much upside. All JMO, - TRJ |
