Mike M.: You are dead wrong on Qualcomm.
Qualcomm is not a buy in the 60's nor is it a buy at $50.
At $60 it has a P/E of 200 which is ludicrous, particularly when it has even less visibility going forward regarding earnings than most tech stocks.
Every now and then, an analyst issues an opinion or insight which is well ahead of the curve and goes against conventional logic. Jonathan Joseph of SSB did it last year in July when he warned that the chip sector was facing a severe slowdown that no one else saw. I believe a research piece from Merrill Lynch's Steve Milunovich entitled: "We Don't Need No Stinkin' 3G Data Rates" is another such article and I would recommend it for your reading. Milunovich argues (convincingly, I might add) that there aren't any applications that will drive demand for 3G. He makes a critical distinction between mobile applications (3G wireless) versus portable applications (wireless LAN applications on a lap-top) and concludes that the killer apps of the non-desktop world will not need to be mobile (3G) but will be portable, handled more easily and cheaply on wireless LANS.
Aside from this philosophical argument, there is enough concrete evidence that QCOM's revenues ain't gonna be there for the next several years. First, there is risk to replacement sales in 01 and the estimates for handset shipment is still being lowered and (IMHO) is still too optimistic. Second, the wireless industry is overly optimistic in its expectation for the replacement rate in 2002 due to GPRS services. 3G deployments will be delayed because of: (1)interoperability issues; (2) technical issues, and (3) lack of handsets. These same factors will also delay deployment of WCDMA past 2002 into 2003-2004. Even Qualcomm's CEO Irwin Jacobs doesn't see 3G services being commercially viable until late 2004 or early 2005.
Other factors which are in play are: the massive debt European telecom companies have amassed following the wireless spectrum auctions. These companies are now capital constrained and are hardly likely to invest in 3G services that do not have a clear path to profitability. Additionally, the longer it takes 3G to find its killer app, the less likely it is that 3G will ever take hold. As the 3G deployment gets pushed out further, wireless LAN services will become ubiquitous and will address many of the needs of portable users of wireless services.
In summary, the combination of decreasing handset sales, 3G deployment delays due to issues discussed above, and capital constrained European telecoms suggest to me that serious earnings revisions are ahead for the wireless sector in general and QCOM in particular. With a P/E of 200, the lack of visibility of 2.5G and 3G deployment should raise red flags with investors. The longer the 3G revolution is delayed, the less likely it is to be a revolution at all. Since QCOM's rich P/E is based on future promise rather than current earnings, I doubt investors will wait until 2003-2004 in the current environment.
I see QCOM as a great short candidate. If there is any sort of tech rally that drags QCOM into the mid-70's or 80's, I intend to take a substantial short position. If it trades sideways between 55-65 between now and April, I will take a short position one to two weeks before QCOM reports earnings. I have little confidence in their ability to meet current earnings estimate over 2001. |
