Thread,
Thanks to GO-Q,
New 3G technology will revolutionize wireless computing, and Qualcomm may be the best way to play the boom
By Mark Cavallone, S&P Telecommunications Equipment Analyst
NEW YORK, Mar. 05 (Standard & Poor's) - With the lion's share of the market for wireless phones dominated by the "Big Three" -- Nokia (NOK.A), Motorola (MOT) and Ericsson (ERICY) -- why should investors care about second-tier manufacturer Qualcomm (QCOM)? The answer, quite simply, is 3G.
Sounds like another whiz-bang tech acronym, right? But what it represents is quite significant: the third generation of wireless technology.
Currently the wireless industry is in the midst of a transition from the first to the second generation -- from analog to digital. Wireless networks based on digital technology are more cost-effective and offer clearer signals. 3G is also a digital technology, but it is better suited to transmit data over the radio spectrum. And when you're talking about data transmission, you're talking about the Internet.
When 3G products are available, users will be able to access the Internet at speeds of up to 2 megabytes per second (versus a maximum of 56 kilobits per second with analog modems) without being dependent on fixed phone lines. This opens up a world of possibilities: travelers with laptops won't have to search around for elusive phone jacks, personal digital assistants like the Palm Pilot could be used to surf the Web at great speeds, and wireless phones could be equipped with a web browser.
Standard bearers
Although Qualcomm does not have the name recognition that the "Big Three" enjoy, it does have a critical role to play in the eventual transition to 3G. The company developed and now licenses the CDMA (code division multiple access) digital wireless technology. CDMA is currently the fastest growing standard in the world; total subscribers tripled in 1998, to 23 million.
CDMA has not penetrated the European market, however. Unlike the U.S., which has a multitude of standards to choose from, Europe has united behind a single technology known as GSM (global system for mobile communications). As a result, the total number of GSM users is approximately 40% of the total number of wireless users in the world. By contrast, CDMA accounts for only about 7.5%.
Still, CDMA is widely viewed by major carriers and equipment manufacturers as the likely foundation for 3G. Should CDMA be adopted as the standard of choice, Qualcomm will likely earn significant license fees and royalties from wireless equipment manufacturers. Potential 3G standards are currently being reviewed by an international standards body.
Sounds pretty promising, right? And yet, Qualcomm shares only recently passed their 1997 high of $72. Investors have been concerned that the company is highly dependent on sales of its wireless phones, CDMA chipsets (the semiconductors that are used in digital phones) and the network equipment that helps operate these phones. While the company has done a good job of introducing a new line of phone products, slowing international economies have hurt financial results and the network equipment unit remains unprofitable.
Perhaps the main threat to Qualcomm, though, is an alternate proposal for 3G, backed by several European manufacturers. This standard, known as W-CDMA, is not compatible with existing CDMA networks, unlike the Qualcomm-backed proposal, CDMA2000. Should W-CDMA gain support, it could stall further construction of CDMA networks. Furthermore, some European firms, most notably Ericsson, have indicated an unwillingness to pay royalties to Qualcomm for 3G-related products. In fact, Qualcomm and Ericsson are involved in a legal dispute involving patents owned by both companies.
While the two companies have a court date pending in June, they are conducting discussions to settle the case and, perhaps, create a new proposal for 3G which would combine both U.S. and European proposed standards. The mere possibility of a potential resolution of the case has had a beneficial impact on Qualcomm's stock price, up over 40% year-to-date.
With a settlement increasingly likely, investors should focus on the potential market for 3G. It is enormous. There are currently over 300 million wireless users worldwide and this number should surpass 1 billion in just 5 years. With 3G products expected to become available in 2002, Qualcomm should benefit greatly if CDMA is chosen as the foundation for 3G. Under existing licensing agreements, Qualcomm receives a percentage of each new CDMA product (both handsets and wireless infrastructure) sold.
Strong signals
But don't ignore Qualcomm's other businesses. The company has introduced very competitive digital phones and gross margins have been trending up as volumes increase. Qualcomm also has over a 90% share of the CDMA chipset business and a profitable messaging service for transportation companies. Wireless infrastructure has been the only sore spot, but a recent restructuring should eventually result in solid profitability.
With its future coming more into focus every day, Qualcomm -- trading at a P/E of 21 times our $3.50 fiscal 2000 (Sep.) earnings per share estimate -- offers a very attractive way for investors to play the ongoing wireless boom. The company carries an S&P STARS ranking of , or buy.
Brian H. |
