The complete analysis by Witsoundview....most surprising fact is the dramatic decline in ASP's at the low-end of the CDMA market. Hmmm....I think it is distinctly possible that this is due to Nokia.
witsoundview.com
Matt Hoffman
Jennifer Baxter
Summary
Although we still may not see a quick bounce in QUALCOMM’ s end markets, our most recent checks show
we are finally seeing firmer handset prices in CDMA channels of distribution. This pricing stability
removes enough of our caution on the ASP front to allow us to focus again on QUALCOMM’ s future
instead of the rocky present. We are upgrading our rating on QUALCOMM from hold to buy, to reflect our
conviction that the greatest near-term risk, above normal pricing declines due to high handset inventory,
has subsided. Our new $80 price target (up from $65) is based on the higher multiple we are now willing to
pay for the company’ s chipset business in light of better market fundamentals. These improvements also
lead us to believe that, at least directionally, estimate revisions are likely no longer pointed downward.
Reasons for the Upgrade
Pricing and inventory – Recent channel checks show two positive signs for CDMA. First, cut-rate, backdoor
auctions of product from major U.S. cellular carriers have ended, meaning they are no longer overbought on most
models. Second, pricing (ASP) on handsets has firmed in the low end at about $115. We were concerned through
early this month because April pricing continued to slide, but with Motorola and Audiovox dual-mode pricing
showing a bottom in May, we are now feeling more confident the worst of the slide is finished. While the $27 move
to $115 from $142 over the past six months (19%) is clearly worse than historical averages of 20% over twelve
months, it does not look like the situation will get worse. Plus, the decline is already factored into the stock.
China Unicom win bolsters interim results before W-CDMA 3G starts – Facing maturing growth rates in its
leading markets of the U.S. and Korea, QUALCOMM would have been less of a growth story to investors without
China Unicom. Market expansion, or growing the footprint, is the key to growth until the delayed start of 3G W-CDMA
kicks in. Without China Unicom, QUALCOMM was more likely to grow earnings at the more tepid pace we
have seen over the past eighteen months, a growth rate which would make some investors question the multiple.
Now we are more confident building a model with material Unicom results, which will serve to help bridge results
through the start of 3G. Our 2002 numbers already included about $0.05 of Unicom, a level we are now more
comfortable with in light of last week’ s contract signings.
1XRTT technology continues to progress, helping chip ASPs in 2H01 – 1XRTT calls are being made in the
field right now. We believe LG (using QUALCOMM’ s MSM 5100 chips) and Ericsson (using QUALCOMM’ s MSM
5105 chip) are making good progress and will be early competitors to CDMA market leaders Samsung, Motorola,
Kyocera, and Audiovox (in the U.S.). Nokia continues to be a laggard in CDMA and is likely to use Telson’ s
products in the short run to be competitive in 1XRTT. Additionally, we believe MSM 3300-based phones should be
widely available for Christmas, bringing safety-related Location Based Services to users during that all-important
season.
Matt Hoffman
Jennifer Baxter
2
Still Some Risks…
Valuation remains rich, but in line with comps – We are now using a 12x 2002 revenue multiple on
QUALCOMM’ s QCT chipset business, a number which is in line with its fabless communications chip comps (that
have also risen). We value QCT at approximately $24 per share. We are now using 2002 results from our QTL
discounted cash flow model to arrive at our $55 a share value. We only value the rest of the company at $1 a share,
leading us to our $80 price target.
Network operator deployment of 1XRTT may be slower than some believe – We continue to believe most of
the base stations put into service before 1999 will need to be replaced as 1XRTT is deployed on CDMA networks.
This will likely keep the growth rate for 1XRTT more modest through the first half of 2002.
Could GPRS steal the global packet data spotlight from 1XRTT? – GPRS remains a less-costly nationwide
packet data coverage technology for cash-strapped European operators than 1XRTT will be for North American
operators who need to do some base station swap-outs (above). Other trade-offs include the fact that 1XRTT
phones will be well in excess of $250 through the beginning of next year while GPRS phones will be under $200 by
that point. However, with twice the voice capacity and twice the data speeds, 1XRTT should prove to be a
formidable competitor in the main market where it competes with GPRS - the U.S. |
