Wall Street Analysts
Periodically we all question why the "Street" so poorly understands Qualcomm and we often suggest that sell-side analysts are dumb, lazy or incompetent. Reflecting on this over the weekend, I thought I might add another perspective.
None of the boys I know are dumb or lazy. I sometimes question their diligence, but more often suspect economic or intellectual agendas or, more often, cowardice and inexperience. Given their (presumed) compensation levels, we expect a lot from Wall Street analysts. In the case of Qualcomm, they must evaluate the competency of management, opine on highly technical issues regarding CDMA versus everything else, understand how standards are created, deal with complex IPR challenges and, last but not least, understand the moving parts of a complicated and rapidly evolving business model. These tasks are challenging enough in isolation, but when one factors in all the competitive noise, the subsequent lack of conviction becomes more understandable.
Now here is an important subtlety. When a sell-side analyst recommends a stock that goes up, who takes credit? How many times have you seen Mario Gabelli or Peter Lynch interviewed on television? When was the last time you heard them (or anybody else) say that the brilliant analyst at Blank&Blank told me to load up on XYZ stock and that's why my performance was so great! I'll tell you how many times..zero.nada.never. So, poop flows downhill. When a stock goes up, the portfolio manager is brilliant. When a stock goes down, it was that stupid analyst at ABC who told me to buy it! Intellectual honesty is a rather scarce commodity on Wall Street.
In response, analysts tend to become timid. Why be "out in front" on a controversial name? Why try to hit the home run and have your career torpedoed by second-guessing and derision because you recommended Qualcomm right before Ericsson gutted the company like a fish? Wasn't it obvious that the business model was working? Wasn't it obvious that the company couldn't manufacture its way out of a paper bag? Wasn't the company's exposure to Asia in general and Korea in particular sufficient reason to be cautious? How could you believe Irwin Jacobs, didn't you know he was just a brilliant snake-oil salesman? These questions can all be answered, but it takes a lot of time, a lot of effort and a substantial amount of intestinal fortitude. So maybe we all should cut Alex Cena, Tim Luke and Greg Geiling a little slack for wavering now and then.
Let's face it, if most sell-side analysts were terrific electronic engineers they would be working for Qualcomm rather than building spreadsheet models and writing research reports. We expect a lot, give little credit when it's due and tend to second-guess nine-ways to Tuesday when somebody gets it wrong. This is compounded by the fact that, in the final analysis, most portfolio managers simply want to know whether the stock will be going up or down right NOW.and everything else degrades to noise. The words still ring in my ears from my days, long ago, on the sell-side. The portfolio manager, at a major Boston-based firm, yelled at me saying, "don't waste my time with all these irrelevant details, is the stock going up or not. If you think its going up, tell me why. If you don't think its going up, then tell me another story or get out of my office."
Within this context, I can picture some poor analyst trying to explain away all the issues surrounding Qualcomm, while defending the stock's attractiveness in face of a $0.25 June quarter. It has got to be tough. Portfolio managers that understand the story, who are focused on the September quarter and beyond, will be buying the stock regardless. Most everyone else will remain in "show-me" mode until something seminal happens. The good news is that psychology can change rapidly, but this, in my opinion, will occur when Qualcomm demonstrates tangible progress rather than from a sweeping near-term change in analysts' opinion.
Best Regards,
Gregg
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