That Qualcomm Mystique, Part 2
By Tero Kuittinen Special to TheStreet.com 01/11/2002 07:16 AM EST
Editor's note: This is the second part of Tero Kuittinen's column about why it's time to buy
Qualcomm. To read the first part, please click here.
Many, if not most, buy recommendations on Qualcomm (QCOM:Nasdaq - news -
commentary - research - analysis) tend to be a tad naive. Whether they say the company
is "the No. 1 pick in the sector" or a "true telecom blue-chip," the boosters often ignore that
plenty of short-term disappointments are always in store, such as a Korean phone-sales
slowdown. (That matters a lot because CDMA as a standard still depends predominantly
on just two markets: Korea and the U.S.)
A Trio of Strengths
Although Qualcomm is no blue-chip because of its tendency to overreach, it's one of the
all-time best trading stocks. Its tendency to bounce back sharply is based on three
strengths: its chipset unit, its 1xRTT (the new upgrade for CDMA networks) potential, and
licensing fees from all W-CDMA products. (W-CDMA stands for wideband code division
multiple access, a type of technology that enables high-speed multimedia services.)
First, Qualcomm has a very strong grip on the CDMA chipset market. That market won't
grow as fast as was forecast, but it clearly has solid growth potential if the new data
upgrade for CDMA networks is successful.
Second, I'll believe about 30% of the claims made about 1xRTT phones and assume that
they'll arrive later than expected, have early stability problems and deliver only about 40
kilobits-per-second data speeds in real-world circumstances. Even so, their potential for
boosting phone sales at Verizon (VZ:NYSE - news - commentary - research - analysis)
and Sprint (FON:NYSE - news - commentary - research - analysis) is solid.
Korea's 1xRTT implementation has had its share of problems -- most of them carefully
hidden from the Western news media. But after some growing pains, that new generation
of phones has had commercial success in Korea. Implementing this standard in Verizon's
network likely will be nowhere near as easy or cheap as was claimed a year ago, but that's
been more or less reflected in Qualcomm's share price.
Finally, Qualcomm's saving grace ultimately may be the licensing fees from W-CDMA
phones and networks. I don't expect these fees will be the much-touted 5% of W-CDMA
gear prices, but even if the figure is about 2% or 3% and W-CDMA is inevitably delayed,
that puts some sort of floor under Qualcomm's share price.
Many people have mistaken this floor to be a guarantee that Qualcomm's share price won't
be subject to violent fluctuations, but the company can always find ways to produce
unexpected revenue shortfalls from other business segments, such as its Wireless Local
Loop program or its BREW software.
By now, markets are expecting the worst from both of those segments, so their future
negative impact should be limited. Even if Qualcomm tends to stumble into no-win
situations (such as trying to sell 1xRTT to TDMA (time division multiple access) operators
and creating a global satellite phone system), the basic strength of its research and
development unit is undeniable.
Perhaps more pertinently, Qualcomm has a captive audience in CDMA operators and their
vendors, who have been locked into Qualcomm's product development projects and have
no way out. Even if CDMA's international growth is bound to disappoint, enough of an
established base exists to support Qualcomm's growth.
California Dreamer
Maybe I'm a sentimental fool, but I've always had a soft spot for Qualcomm. In many ways,
it's the quintessential California company. Under the flat, harsh sunlight of San Diego, there
are no shadows and no history. The past chain of strategic mistakes is airbrushed out of
history. The company operates with the same attitude that it always did. Old hype never
dies; there's always the next phase or new plan.
Maybe CDMA networks aren't doing that well; just wait until 1xRTT arrives. And perhaps
1xRTT isn't quite what it was billed to be, but never mind because an improved variant is
really close to being implemented commercially! Any day now, the final, much-deserved
jackpot will arrive.
Somewhere amid this cheap razzle-dazzle spin is a real core of technology expertise.
Qualcomm has lost ground to Nokia (NOK:NYSE ADR - news - commentary - research -
analysis) in the low-end CDMA chipset market, but it likely will hold a commanding lead in
the high-end 1xRTT chip market. Qualcomm might even emerge as a leading W-CDMA
chipset company, despite its originally vehement opposition to this standard.
The core theme in CDMA mythology is Qualcomm as the messiah of the U.S. telecom
industry, the new tech champion that leads U.S. mobile telecom companies toward a
brighter dawn. Outside the U.S., Qualcomm is regarded as a black widow, and the list of
companies that believed in the CDMA dream tells us why. Globalstar is bankrupt. NeoPoint
is out of business. Audiovox (VOXX:Nasdaq - news - commentary - research - analysis) is
locked into a spiral of decline. Motorola (MOT:NYSE - news - commentary - research -
analysis) and Lucent (LU:NYSE - news - commentary - research - analysis) -- well, you
know.
Years ago, Qualcomm convinced Motorola and Lucent that they should concentrate on
CDMA and de-emphasize global systems for mobile communications, or GSM, network
development. During the past year, the No. 2 and No. 3 U.S. mobile operators placed giant
GSM network orders -- and none of it went to U.S. vendors. Almost single-handedly,
Qualcomm's siren song of anti-GSM emphasis managed to doom Motorola and Lucent as
future AT&T Wireless (AWE:NYSE - news - commentary - research - analysis) and
Cingular mobile network providers. This is no small achievement, considering that Lucent
was originally spun off from AT&T.
Qualcomm has turned out to be a lethal partner. Only Samsung has gotten substantial
gains out of its big bet on CDMA. Qualcomm got most of what it wanted out of its grand
project of the past decade: CDMA became the world's second-biggest standard. But the
idea that any money is to be made for the equipment vendors, squeezed by volume
competition from the dominant GSM companies, turned out to be fool's gold.
I know people who have taken an "all-CDMA" investment approach and gotten crushed by
the toxic Globalstar-Audiovox-Lucent combo. But if success is in store for CDMA and its
1xRTT upgrade, I'm betting that Qualcomm will be the only company to benefit. Other
companies can successfully build CDMA gear, but Qualcomm can always offer favorable
terms to new entrants. For example, Qualcomm recently rewarded its most loyal Korean
allies by granting the Chinese vendors ultrafavorable licensing deals.
Sure, there's a chance that 1xRTT will jump-start CDMA's global network growth. And
W-CDMA products may eventually find a genuine mass market. What's my advice for
people who want to have a specifically CDMA-weighted investment strategy? Buy
Qualcomm -- and only Qualcomm. In GSM, GPRS and W-CDMA markets, several winners
may emerge, and it's not obvious which ones will be the biggest in the long run. But only
one winner will emerge in the game that Qualcomm has devised: Whether the prize in the
CDMA/1xRTT market will be great or small -- the house takes all. |
