Good (long) post Qveau... several points worthy of subsequent discussion. Time doesn't permit a complete response now... maybe later.
However a few highlights.
I understand the primary complaint you and John have about QCOM is the valuation, and an insistence that such a consideration must be made on the basis of the GAAP # and not the operating number.
I would prefer to be characterized differently. Yes, my complaint is valuation. The basis of valuation has less to do about "GAAP" versus "Operating number" than it does with economic profit. Which is the sum of discounted free cash flows. And I presume that you will agree with me that a company does not make me any wealthier by taking money I used to have and giving it back to me. This just moves my wealth around.
Nor does it make me any wealthier if it sells my assets and gives me the cash value that they were worth in the first place. This just makes me more liquid.
And finally, if the company liquidates assets in the process of operations and then invests these liquid assets in the process of financing, then I don't even get to enjoy the benefits of liquidity. Particularly if the re-frozen assets end up subsequently being tallied as "strategic". [And written down to zero!]
Movement of wealth and liquidation of assets are not generally a wealth-enhancing thing.
So when I perform a valuation exercise, I am very careful to watch the rate at which real wealth is being increased. Net of wealth being spent, consumed or otherwise disposed of, and not inclusive of wealth being moved from pocket to pocket.
This, therefore is the biggest point of departure I have with the folks who would simply look at the "operating number" and try to declare a result.
On your points:
1... The operating number therefore is a more accurate predictor of the GAAP numbers to come. Possibly. However I suggest you review the segment information in the balance sheet and review the disposition of assets. What fraction of Qualcomm's current assets are classified as "strategic", and if these do indeed represent legitimate marketing expenditures and we can expect them to go to zero, there is a lot more waiting to disappear off of income in the future than was written off this last quarter.
And 1 The capital commitments being made by major, heavy hitters to enter the CDMA chip market is, you must agree, at least a validation that did not previously exist ofCDMA 2000's place in the future of wireless.
Yes. It is also an indication of deterioration in Qualcomm's monopoly position. The issue is not whether the pie gets larger, but the size of Qualcomm's slice of the pie. The number of chip suppliers does not increase number of wireless consumers. And unless I misread the thread, the thesis behind a high valuation is that CDMA of one form or another will be in every device. So what we are seeing is validation of this premise without increasing the size of the market. More entrants therefore are threatening to squeeze Qualcomm's revenues.
To your point 2: 2. The other point that's often overlooked in all the table-pounding over GAAP is that QCOM's policy is to recognize unrealized losses through writedowns, but not unrealized gains. To the extent that the sudden emergence of several big-name chip competitors bolsters the probabilty that CDMA growth lies ahead, then the value of QCOM's patent portfolio must be seen as having risen as well. This "unrealized gain" appears nowhere in the GAAP number. To the extent that the writedowns have any significance at all, it would appear that ,dollar for dollar, the assets increasing in value are every bit as important to a determination of an overall value for the company.
Yes. I would only add that one must contemplate liabilities and dispositions in the total. But otherwise we are in substantial agreement. I suggest you review the rate at which shareholder equity net of paid in capital is increasing. You might be surprised.
Your (3) has already been substantially addressed.
As to (4): ...In fact, wouldn't it be more accurate to calculate QCOM's p/e ratio as being a multiple of the stock price LESS cash per share. Cash is cash. Dollar for dollar. It's made already and net of corporate taxes. What we really need to look at is the what we're paying for the operating business itself. Which is only about $25 per share. Depends on what you want to say.
The same argument might be held for Cisco, but in an even bigger way. However, when we look at the absolute rate of increase of distributable shareholder wealth... it is not increasing at a rate that would justify paying $25 for the rights to own it all.
Your (5) I do not understand. As to the impact of competition on QCOM's growth rate, no one seems to have much confidence in the value of QCOM's CDMA intellectual capital, which should enable QCOM to remain far and away the market leader in the growing CDMA market.
If my son is the market leader in the growing summer lemonade stand market, that doesn't necessarily mean he's worth a lot. Particularly if it's costing him as much as he's making to maintain his market leading position.
I'm out of time for the moment, but will address the points [6]+ later.
Regards,
John |
