1. The losses in Strategic Investments will end, and GAAP = pro forma. This will happen, either because QCOM management stops doing these investments, or they get a lot more competent about choozing what to invest in. So far, their track record in these investments is very poor (cash poured in > profits from good investments + profits from sales generated), so I'd say the best thing is just to stop altogether. I have the same opinion, about telecom-equips doing vendor financing. JustSayNo, is the best policy.
What I'm worried about is that if Qualcomm doesn't continue to fund these companies, how will that effect their business? We saw companies like Cisco, Nortel, and Lucent give 150%+ vendor financing to carriers. You simply can't have 20 companies offering bandwidth so something had to give. It finally became apparent that this trend could not continue. Revenues and profits at these companies collapsed because it was being funded and supported by irrational and unsustainable businesses. You can't have 20 carriers or 20 companies selling books or furniture online. So how could all of these businesses have been formed in the first place? Surely, the CEOs of these companies had to wonder if they could get a return on their investment? How in the world could Americans, the supposed leader in capitalism, start so many businesses that failed in industry that clearly did not need so many? (I partly answer this question later on..)
Is Qualcomm doing the same? Maybe, partly. Although companies like KDDI, Verizon, or Korea are sound customers (relativity speaking).
What I'm afraid of is that Qualcomm uses their cash to fund CDMA carriers in countries and markets that simply DO NOT NEED ANOTHER CARRIER NOR CAN THEY SUPPORT ANOTHER ONE. If CDMA really offered large enough benefits and value to the consumer and allowed this new CDMA carriers in say Europe (a area that doesn't need another carrier) to cut prices enough where they could steal marketshare and market a profit, then I might say it's worth it.
We had too many carriers because the market was assigning valuations and market caps on companies they were not rational. If you are an old energy company and you see a fiber optic carrier is worth 40 billion (losing hundreds of millions by the way). Would you spend 3-4 billion to build out a similar network across your already established pipeline, then IPO this company which would then recieve something like a 15-25 billion dollar market cap? All this was a transfer of wealth from common investors to the management teams of these companies. Do you really think these guys thought they'd get a return? I just have a hard time believing this. They just knew they had to take quick advantage of this blimp in rationality. Please, someone tell me I'm wrong..? In doing so, they created more supply than demand. I have to believe that the CEOs of Nortel and Lucent had questions about carriers that won't make a dime in profits for 10 years. Especially the CEOs of old telecommunications firms. They should have known better. Look back to y2k. Was this just the biggest joke in human history or is it just me? I always look back at past predictions and see where they went wrong. Why didn't the computer people refute y2k scare? Where was Bill Gates and Michael Dell, who have a large voice, refute the y2k scare? Then it hits me. They are not going to say a word when they've got corporate America upgrading their PCs to a fear that never was.
I believe it's important to understand why and how this happened. Or else we'll never learn anything. If we focused on the industry fundamentals (things like supply and demand, number of companies in a industry, margins, or whatever else, we may have saved ourselves alot of money. There is a reason Warren Buffett said thinking sensibly about business will take you long way! Even Peter Lynch says focus on the funemtnals. We should have been weary when we hear energy companies are getting in the telecommunications industry. Instead, we jumped for joy and bought more JDSU shares. That's what Buffett/Lynch mean. Focus on the funemtnals. This is what drives profits up or down. And well, profits drive stock prices. Telling yourself that companies HAVE to spend on 3G because they bought the spectrum is, frankly, pretty stupid. Telling yourself that companies will continue to spend on storage b/c companies continue to create demand is far from a complete analysis of the entire situation. Along with being a investor, Warren Buffett is a businessman. This gives him the advantage of being better able to determine when things make sense and when they're irrational. All those analysts that said storage will remain strong because people have to spend on storage or carriers will build a 3g network because they don't want to look bad would not fly in the face of Buffett or really any sensible business person.)
oh, well..that is past (i'll never forget this experience and next time I see management forming companies in a industry that simply can't support all of them, I'll know bad times are ahead). Looking towards the future..who knows. Maybe, this will cause everyone to lose faith in corporate America and I can then find companies growing EPS 20% a year at a multiple of 10. That would be something.
Lynch - It's easy to make money in the market when good companies are trading at p/e ratios of 4-8.
2. The large losses continue, and investors start valuing the company based on GAAP results. This implies a much lower stock price, from today's level. Annualize today's GAAP earnings, assign a PE of 40, and you get a stock price of 8.
Jacob, you've got a great ability to be objective and flexible with your investments. That's one reason I like your posts. You know these losses can not be ignored forever. In a way, they are similar to what the optical players were doing.
"Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it-even though others may hesitate or differ" - Benjamin Graham
After reading this quote, what are your thoughts on Qualcomm?
If two one-legged men strap themselves together, what are the chances they become a sprinter?
Here's another thought. What's the different between Aol+TimeWarner and HP+Compaq?
Expectation and perception. There were huge expectations built into Aol's stock price. They turned out not to be as great as we once thought (although, I wonder if it wasn't for the dramatic drop off in advertising how this company would be fairing?)
HPaq? Everyone is expecting the worst. So if HPaq delivers the worst, the stock does nothing. If HPaq delivers half way decent results, it would be more than what people were expecting and had priced into the stock, therefore, you could make a profit.
HPaq = #1 in PCs, #1 in printers, leader in storage (#2/3?), leader in servers and handhelds, anything else? Yet no one wants to own this stock? Hmmmmm.............
This may be a too simplistic view of HPaq, but just something to point out. In almost every single segment, HPaq will have more market share. Yet that's a bad thing? In the end, all that matters are higher profits. Will this company create higher profits..? More market share in markets that don't create profits is not exciting. But that's not the case with this company. PCs are just a small part to these companies which allow them to sell other services and products.
Will HPaq lose some business to Dell or IBM? Sure, but I doubt it'll be anything meaningful. Things tend to get blown out of proportion pretty easily. |
