Rory,
<< Matt Hoffman ... Is that what you think he's saying too? >>
This is one of the articles that quotes Hoffman. His viewpoint, always along these same lines, is finding its way into quite a few articles lately. I relly don't have much background on him. He is kind of like this Nokia Bear, Per Lindberg, out of Sweden, he runs on a narrow track.
I do think that there is an element of truth in what he says, but really, that is why SpinCo is being created, and I think SpinCo is masterful, but it is unfortunate we do not have agood climate for an IPO.
>> Qualcomm Faces Conundrum
By Dan Briody
Redherring.com,
December 12, 2000
These days it seems nothing comes easy for Qualcomm (Nasdaq: QCOM). After coasting through 1999, its stock gaining a mere 2,600 percent on the year, 2000 has been a considerable struggle for the former Wall Street darling.
The latest speed bump for Qualcomm was Monday's ruling by the International Court of Arbitration that it would have to share royalties with a former partner in South Korea, the Electronics and Telecommunications Research Institute. Qualcomm said it would take an $80 million charge to cover the costs of the royalty payments; the news sent the stock down 3.6 percent on what was otherwise a strong day for technology stocks.
Qualcomm currently trades at $99.50, a far cry from almost a year ago when it hit $200 (just after a four-for-one split, no less). When Qualcomm finally succumbed to gravity in early 2000, it hit the ground hard, plummeting 68 percent in six months to hit a 52-week low of $51.50. Some may remember that number as being the legal code for a clinically insane person (not to mention the title of the first Van Halen album of the Sammy Hagar era), but for Qualcomm it marked the beginning of sanity in its stock price.
So what now?
BE READY TO BE CONFUSED
When looking at Qualcomm's gains since its July nadir, it's important to keep in mind the market conditions within which the stock was able to rally. In the five months since bottoming out, Qualcomm has been able to gain 93 percent. During that same time, the Nasdaq lost 27 percent of its value.
Investors have shaken off a lot of bad news -- about the overall market as well as about Qualcomm -- to bid the stock up to its current level. Late last month, Japan's NTT DoCoMo (OTC: NTDMY) agreed to acquire 16 percent of AT&T Wireless (NYSE: AWE). As part of the deal, AT&T decided to spurn Qualcomm's CDMA technology in the near term and build out a GSM network in the U.S. In addition, doubts about Qualcomm's true prospects in the 1.2 billion-person Chinese market have failed to slow the stock down significantly.
Perhaps investors are just now starting to buy into the picture that Qualcomm executives have been struggling to paint for the better part of a year. Almost all major carriers will someday be using some flavor of Qualcomm's patented CDMA technology for their third-generation (3G) networks, whether they choose W-CDMA (based on some Qualcomm technology) or CDMA2000 (developed entirely by Qualcomm).
In their attempts to dispel what they perceive to be a misconception about Qualcomm's royalty arrangements, company executives will tell you unequivocally that Qualcomm receives the exact same amount of money, regardless of whether a carrier chooses W-CDMA or CDMA2000. Yet it is still widely believed that Qualcomm will make far less money on W-CDMA buildouts than on CDMA2000 buildouts.
"The reason this is true is that the way Qualcomm's structured their royalty agreements, whether you use one or all of their patents, you pay the same amount," says T.C. Robillard, analyst at Salomon Smith Barney.
NOT SO FAST
But it's not really that simple. Matthew Hoffman, an analyst at Wit Soundview, openly challenges Qualcomm's claims, saying the company has used cleverly worded royalty agreements to sell a semantically loaded proposition to the public.
"Don't underestimate how complicated this story is," says Mr. Hoffman. "We have challenged the assumption that it will be the same royalty stream because the intellectual property rights in W-CDMA are shared much more evenly between all parties than in CDMA 2000. In fact, our understanding is that Ericsson (Nasdaq: ERICY) has the lion's share of patents in W-CDMA."
The plot thickens. Mr. Hoffman estimates that the difference in royalties between a CDMA 2000 handset and a W-CDMA handset could be as great as 3 percentage points. That ain't chump change when you're talking about billion-dollar markets.
While AT&T's GSM network and the South Korean royalty ruling -- in addition to the $80 million charge, Qualcomm must also pay $4 million per quarter to its former partner for future royalties -- are undeniable setbacks, Qualcomm officials are eager to keep investors looking at the bigger picture. A press release distributed the day of the AT&T announcement applauded the company for choosing to build a W-CDMA network in the U.S. and, not surprisingly, ignored the GSM network plans. Inexplicably, the stock rallied 3.4 percent on the news.
"The casual investor may have been fooled by Qualcomm's press release, but the AT&T Wireless move was a defeat," asserts Mr. Hoffman.
HEAD FOR THE SIDELINES
Given the sharply divided sentiment on its strategy, it's hard to say what the prospects for Qualcomm's stock are in the near- or long-term. Back in early October, we predicted that the stock was beginning a nice little run, but with it now trading at 78 times its fiscal 2001 earnings estimates, it might be time to reëvaluate and wait for some very important questions to be answered.
It will be difficult for investors to judge Qualcomm's results for the first quarter of fiscal 2001 (ending in December), considering the one-time $80 million charge. And if Mr. Hoffman's views prove true, eventually Qualcomm's lower royalty payments will show up in its future quarterly earnings. But either way, it makes sense to take a breather, or at least some profits, on Qualcomm's fall run, and wait to see what happens. <<
- Eric - |
