S&P 2005 Tech Outlook –
QCOM snips >>>>>>>>>>>>>
Kenneth Leon, wireless equipment
We believe 2004 will be a tough act to follow in terms of the worldwide demand for wireless handsets. We estimate that the wireless industry will have shipped more than 630 million handsets by yearend 2004, a 30.4% increase from 2003 and significantly above the 14.5% increase experienced in 2003 over 2002.
The key drivers for handset growth in 2004 were a faster handset replacement cycle in developed countries in Europe and North America and in Japan, as well as burgeoning demand in emerging markets in China, Southeast Asia, India, and Latin America.
We're also at the beginning stage of wireless carriers transitioning their networks to third-generation (3G) network applications using code division multiple access (CDMA), 1x-EV-DO, and WCDMA. The countries most advanced in this transition are Japan and South Korea. We believe most of the major wireless carriers in North America will complete the network migration to 3G by 2006. 3G AT LAST? In the year ahead, we forecast near 700 million handset units will be shipped in the global market. In our view, the normalized growth for handset shipments may be in the 8% to 10% range for 2005 through 2008.
Another dimension to the handset market is the transition to 3G CDMA-related networks from 2G global system for mobile communications (GSM) systems. We estimate that 73% of total handsets shipped in 2004 will be GSM-based handsets, vs. 27% for 2G CDMA-related handsets. Our long-term forecast is for 45% of total handsets shipped will be CDMA-based in 2008 compared to 55% for GSM-related handsets.
Two companies that we see benefiting from the transition to 3G are Qualcomm (QCOM ; strong buy; $43) and Motorola (MOT ; strong buy; $18). We view Qualcomm as the best in its class, with one of the most attractive business models in the telecommunications industry.
QUALCOMM'S QUALITIES. In many ways, we see parallels to the success Microsoft (MSFT ; strong buy; $27) enjoyed in the last decade. Qualcomm has what we see as a unique position of pricing power from its intellectual property in designing CDMA for the mobile wireless industry. The strength of its patents has enabled Qualcomm to receive high-margin license royalty fees from all users, handset and infrastructure suppliers, as well as service providers that use CDMA for software enabling applications.
In addition, it's the leading fabless semiconductor company, with more than 98% of the worldwide market for CDMA chipsets. Fabless means the company designs and upgrades its product portfolio of CDMA chipsets, and then outsources the manufacturing to foundries of IBM and Taiwan Semiconductor Manufacturing (TSM ; hold; $8).
Plus, Qualcomm generates substantial operating cash flow to meet capital requirements, make strategic investments, and pay a dividend on common shares. As of Sept. 30, Qualcomm had approximately $7.6 billion in cash and cash equivalents, or approximately two-thirds of its total assets with no long-term debt. Applying a p-e multiple of 35.3 to our fiscal year 2006 (ending September) EPS estimate of $1.50, a premium to peers that we think is warranted by above-average growth potential, we arrive at our 12-month target price of $53.
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