First Union Securities Inc. Covers QCOM
By: First Union Securities Inc.
2/23/01 5:23 AM
Source: News.com
Morning Notes:
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QUALCOMM Incorporated (QCOM-NASDAQ) Company Note QCOM: Shares Weak On Several News Items That Need Deeper Look --- Reiterate Strong Buy Rating: 1 Price: $66.94 52-Wk. Rng.: $163-52 Shares Out.: (MM) 747.7 Market Cap.: (MM) 50,047.8
Key Points
• QUALCOMM shares were weak yesterday along with most other stocks in the sector. We believe this was due to several news items that may have raised investor fears.
• Kyocera apparently reduced their forecast of global handset demand to 450-500 million. We think their visibility on global demand is poor.
• Nortel Networks, Samsung and PrairieComm announced an agreement to develop 3G W-CDMA equipment using PrairieComm™s chipsets. This raised fears about QUALCOMM™s future revenue streams. This should be a non-issue.
• Overlooked was further evidence that Nextel is moving closer to a CDMA overlay. This would increase QUALCOMM™s addressable market.
• Overlooked - QUALCOMM is making an impressive show at the GSM World Congress in Cannes, France. We think it is a growing likelihood that some TDMA & GSM carriers will opt for a CDMA2000 1x overlay.
• We reiterate our Strong Buy rating on the shares. Our $90 price target is based on our long-term CAPM.
Company Description
Qualcomm Inc. designs, develops, manufactures, markets, licenses, and operates digital wireless communications, infrastructure, and subscriber products, designs, and services.
Discussion
QUALCOMM shares were weak yesterday along with most other stocks in the sector. There seems to be no end of bad news. However, we suspect many investors, as is often the case, are overlooking a deeper analysis of the facts that consequently make QUALCOMM shares look oversold. Consequently, this makes QUALCOMM shares look oversold. We would be using the current weakness as a buying opportunity, all else being equal.
It was widely reported in the news that Kyocera has reduced their forecast of global handset demand to 450-500 million, which appears to us to be about a 10% reduction. This further unnerved QUALCOMM investors on two counts. First, it goes without saying that weaker handset demand would undoubtedly affect demand for CDMA handsets at some point. Second, Kyocera bought QUALCOMM™s handset division last year and still sells phones under the QUALCOMM label, leaving Kyocera disproportionately tied to demand for CDMA.
We think Kyocera™s comments have been over-weighted by investors for several reasons:
• Kyocera™s visibility on global handset demand is quite low. Dataquest estimates that Kyocera has about 3% marketshare. Nokia, which is the largest handset manufacturer in the world with 1/3 of the market, is expecting between 500-550 million handsets to be sold this year.
• Our 2001 forecast is for global demand of 505 million handsets which we believe is conservative. For global demand to drop below 500 million we believe the fundamentals would have to erode to levels we have not seen any time in the last decade. Over the past decade growth in incremental subscribers has consistently risen Œ in 2001 we project it flat with 2000. The average replacement rate of phones has consistently accelerated Œ we have assumed in our forecast a replacement rate that is only slightly faster than 2000 (slower than the trend line of the last 5 years).
• We believe that Kyocera has small and declining market share. This makes a slowdown in demand for them have a diminishing risk for QUALCOMM.
Nortel Networks, Samsung and PrairieComm announced that they will interoperability test W-CDMA handsets and infrastructure based on PrairieComm™s W-CDMA chipset. Some investors were concerned that this announcement limits QUALCOMM™s future revenues from chipsets because Samsung and Nortel are both current chipset customers of QUALCOMM.
We are unconcerned about this announcement for several reasons:
• Just to be conservative, we have assumed in our models that QUALCOMM gets no W-CDMA market share. Any market share they do get will be upside to our estimates and long-term growth rates.
• We have confirmed with QUALCOMM that PrairieComm does not have a license from QUALCOMM that covers 3G CDMA. This is interesting but no big deal. We suspect that PrairieComm will extend their current CDMA license with QUALCOMM to cover 3G which usually entails a multi-million dollar up-front license payment and ongoing royalties on each chipset sold.
• Samsung has announced that they were going to stop using QUALCOMM™s chipsets in the past but have never done it. They remain one of QUALCOMM™s largest customers.
• We don™t think PrairieComm is much of a long-term threat to QUALCOMM. PrairieComm has had a CDMA license from QUALCOMM for many years and has announced CDMA chipset availability. To our knowledge, PrairieComm has yet to win a single design-in for its chipset. We wonder how successful they will be in 3G which is technologically tougher than 2G.
• QUALCOMM has maintained effectively 100% of the merchant market for CDMA chips against tough potential competitors. QUALCOMM has 5 licensed merchant chip producers for CDMA and two licensees that can sell merchant chips. Both Lucent and Motorola, two of the most experienced companies with CDMA can sell chips in the merchant market. Lucent has said they don™t intend to try and Motorola has had no takers. Of the 5 licensees, PrairieComm, Texas Instruments, Intel, LSI and Phillips Œ none has any announced design wins that we are aware of.
We expect the market for 3G CDMA chips to be much more competitive Œ hence our conservative estimates. However, we note that only QUALCOMM has announced firm sampling dates for their W-CDMA chip and is the only company shipping commercial quantities of IMT-2000 3G chips (CDMA2000 1X). We expect Nextel to move forward with a nationwide deployment of CDMA, which raises the addressable market for QUALCOMM in our models Nextel has been hiring engineers for what could be a CDMA2000 1X deployment. They are currently running CDMA trials. We find this ironic because of Craig McCaw™s involvement with Nextel. When CDMA was first proposed as a U.S. digital standard, McCaw cellular was a vocal opponent.
We wouldn™t be surprised to see TDMA and GSM carriers around the world start to move toward a CDMA2000 1X and 1XEV overlays. We believe that some of the early performance indications from the GPRS deployments in Europe are disappointing. Several reports we have seen are indicating that GPRS in the field is not getting anywhere near the 100 KBPS that was advertised and instead are getting average throughput of about 20 KBPS with peak rates of only about 40 KBPS. This is an interesting contrast to what SK Telecomm is reporting about field deployments of CDMA2000 1X in Korea. SK Telecomm is saying they are getting about 100 KBPS of data throughput on top of a 1.4-1.7x increase in voice capacity. Additionally, several people we spoke with who are at the GSM World Congress in Cannes, France say that there is growing interest among GSM carriers in the potential of overlaying CDMA2000 1X Œ something that would have been nearly treasonous just a year ago. We have confirmed that several TDMA carriers in Latin America are considering an overlay of CDMA2000 1X. If any TDMA or GSM carriers around the world opt for a CDMA2000 migration path, it would be upside to our models.
We reiterate our Strong Buy on the shares.
Additional information available upon request.
First Union Securities, Inc. maintains a market in the common stock of QCOM. The (an) author(s) of this note/report has(have) a long position in the securities of QCOM. Please Refer To Ticker FUNBDISC For Important Legal Disclosures.Copyright 2001 First Union Securities, Inc.
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