10 tech buys, and 10 tech sells. is cover story for Barrons today.
Qcom excerpt
Telecom
Cut The Cord
Let's be blunt. We're worried about the cellular business. The issue is
relatively simple. The market for cellular voice traffic is maturing. The
cellphone companies think they can stimulate replacement demand with color
screens, built-in cameras and other new features. And yet most people use
cellphones to make voice calls. We fear current estimates for handset sales
for both this year and next year are too high -- and if that's true, the stocks
could see another down leg.
Merrill's Milunovich says the cell- phone makers are suffering from a
condition Harvard tech guru Clay Christensen calls "overshoot," meaning
current technology is already more than good enough for most users. In
markets where that happens, Milunovich says, profits shift from systems
companies, such as Nokia and Motorola, to component companies, such as
Qualcomm and Texas Instruments.
Montgomery's Rezaee says he'd be a buyer of Qualcomm shares "once the
dust settles." The company's CDMA technology has a strong foothold in
Korea, Latin America and in the U.S., where Sprint and Verizon have
standardized around it. Unlike Motorola or Nokia, Qualcomm does not make
phones. Rather, it collects licensing fees from systems using CDMA
technology, and it sells chips for CDMA-based phones. With the stock
trading for about 23 times expected earnings for the September 2003 fiscal
year, though, it seems fully valued.
Of the large handset companies, Motorola is having a better time of it for the
moment than Nokia. While Motorola has been showing some results from a
long restructuring process, its Finnish rival has lost some market share.
Motorola is "doing things it should have done years ago," as Rezaee puts it,
although it remains to be seen if the company can produce reliable revenue
growth.
Nokia dominated the phone business in the late 1990s, thanks in part to
ineffective competition from Ericsson and Motorola. But competition has
heated up. Though not in our top 20, the company gaining the most ground in
the wireless phone market at the moment is Samsung. Meanwhile, the sector
as a whole could see more disappointments, as the industry's struggling
carriers attempt to lure investors to use additional services made possible with
so-called 2.5G and 3G services.
Neither handset maker looks expensive at the moment -- Nokia trades for 14
times expected 2003 earnings, versus 24 times for Motorola, though
Motorola looks cheaper on a revenue basis, at 0.9 times expected 2003
results, about half that of Nokia. And yet we think estimates, and stock
prices, face one more down leg. For now, we would not be buyers of any
companies in the handset business. |
