To all,
I've glanced at literally more than 1000 posts on several forums (something made much easier with Road Runner.) Some of my following thoughts may be no-brainers, but it will help me to put this stuff in writing even if it doesn't help anyone else. :) Beware, this will be a long post.
1) The single biggest revelation for me was to learn that adoption of CDMA is clearly in the early stages of the tornado, growing at more than 30% per quarter for four consecutive quarters.
2) The second biggest revelation (which might do nothing more than showcase my previous ignorance) was that CDMA has the lead in the U. S. in both geographic coverage and size of population in those areas.
(I'm not ignoring that CDMA doesn't command such a clear lead in other parts of the world.)
3) There are all sorts of arguments about why Chinese authorities might or might not standardize on CDMA. No one has a crystal ball, but it is a major event that they have authorized the build-out of a CDMA-based network.
4) Though the news of the Ericsson/Qualcomm deal was the catalyst of investors' increased interest in the Q (me included), its not the deal in itself that is particularly important. It's the ramifications.
Ramification #4A: The fallout we expected from the deal has come to fruition. Industry insiders and pundits are all saying unequivocally that the deal makes it easier to arrive at a world-wide standard (which some now say might come as early as November). When ever it happens, it will make the pie grow and everyone's slice of the pie along with it.
Ramification #4B: I have come to the conclusion that Ericsson caved, in every sense of the word. Similarly, Qualcomm won the so-called Holy War. (Those who have followed the CDMA story know the phrase is not a reflection on the religious significance of this weekend for Jews and Christians.) My thinking is substantiated by the numbers. Though we haven't seen details yet, Qualcomm apparently did not give up any royalties. On the other hand, the Q will pay minimal royalties for the few patents Ericsson has.
Additionally, the Q's CEO is reported to have said that the one and only real win Ericsson got was a steal of a deal in the price they paid for the infrastructure business. In other words, Ericsson got their one-time win and the Q got their win for royalty-based annuities that will pay long into the future. Because it is vital to the Q's future that Ericsson feels like a partner and gets a win out of the deal, they got the win that will hurt the Q the least.
Another reason Ericsson caved is because it needed CDMA to have greater access to China. They have a history of doing business with China and didn't want extended business to be thwarted by not having access to CDMA. That the first Chinese news about a CDMA network came so close to Ericsson's deal with Qualcomm is not a coincidence in my opinion.
Ramification #4C: The essence of the previous ramification is that a major international competitor just became a partner who openly and desperately depends on the Q's success. This is a great lesson found in the required reading of Value Chain 101.
5) Speaking of the value chain, there is an important fact that should not fall on deaf ears. Microsoft depends on Qualcomm to include Windows CE in its handhelds. Sun depends on Qualcommto include PalmPilot technology in its handhelds. They are so dependent on Qualcomm that neither was able to negotiate an exclusive deal. That dependency is the essence of the value chain.
6) Since my last visit to the folder, there has been a mild debate about whether the Q is a potential or established gorilla. If it's not the established gorilla of the CDMA space, who is? (That was not a rhetorical question.)
7) Possibly the larger, more important question is whether or not being the gorilla of the CDMA space makes Qualcomm the enabling gorilla of cell-based communications.
I think it's too early to call it the gorilla of that larger space, but I do think it has the best shot at it. The path to the top of the mountain is easier than I previously thought. In my research I've learned that the cost of siwtching from TDMA and GSM is not as high as I thought. It's not entirely a matter of replacing earlier technologies with CDMA or using CDMA instead of the competing technologies. CDMA can be overlayed on existing TDMA and GSM networks, enhancing them by adding value to them. That gives the multi-national companies various options about how to invest in their CDMA offerings.
8)The Numbers (Close your eyes, Chaz too. :)
Comparing the Q to Microsoft, Cisco and Intel is what everyone is prone to do lately. That's partly because the enthusiasts would like to think the Q will be the next Cisco, Intel or Softie, and partly because there are so few pure-play enabling technology providers with which we can compare Qualcomm.
The biggest red flag is that, compared to the other three, we have to get out the microscope to see the Q's profit margins. But the sale of the infrastructure business will improve that to a certain extent. Based on one analyst's numbers, I calculated that the profit margin will nearly double to something north of 6% in FY2000. Hardly typical of a gorilla, but a small improvement.
Speaking of the sale of the infrastructure biz, that analyst lowered FY2000 revenue expectations from $4.5 billion to $4.0 billion but raised estimated EPS from $3.55 to $4.35.
PSR: Qualcomm's PSR despite the huge run-up is still less than 3.0. Compare that to Cisco, Softie and Intel at 18, 28 and 8, respectively.
PE: Qualcomm's PE is 85, twice that of Intel, the same as Softie and two-thirds of Cisco.
Forward PE (using EPS as $4.35): Qualcomm's is 32. Cisco, Softie and Intel are 60, 62 and 22, respectively.
It's truely hard to know how fast Qualcomm will grow in the next five years but most people seem to be thinking it will be at or in excess of 50% annually. My thinking is to look at the next five years as a blip in time and, instead, look at the next fifteen. Doing that, I come to the conclusion that now is a great time to pick up the stock despite the recent run-up.
9) Traditional Stock Valuation.
Before everybody blasts me by reminding me that gorillas have always been valued by the market far in excess of traditional valuations, I am aware of that. Understanding that, I have what might be a surprise for you.
Using the forward EPS of $4.35, the trailing PE is only 10% greater than the estimated growth. If I am correct that Qualcomm is a gorilla, this presents a very unusual opportunity to invest in a gorilla when there is no (or little) market premium to the expected growth rate.
I suspect that is explained partly by the unusually low profit margins for a gorilla and that the very recent Ericsson deal was needed in many minds to confirm the gorilla status. Though the run-up has been impressive, all investors haven't had time to react and analysts haven't had time to raise estimates. I suspect most analysts are waiting for the details that will be unveiled in the upcoming quarterly report and conference call.
10) (Someone please tell Chaz it's OK to open his eyes.) My impression is that if Qualcomm continues to sell handsets it will never achieve the profit margins of the big three gorillas. People are likening the Q's software model to Microsoft and the Q's micropocessor model to Intel, ignoring the drain the handset biz will put on resources. If the handset biz adds sufficient dollars to cash flow and earnings, investors will be willing to overlook the smaller, overall margin.
11) The Future: Qualcomm is far from a one-product company. There are many CDMA patents offering various market opportunities.
The buzz of late that probably has the biggest opportunity is that the Q is working on a microprocessor (MSM4000) that will allow hand-held computers and handsets use the same microprocessor. That will lower costs substantially because two different microprocessors are currently needed.
The buzz of late that has the most sex appeal (because all of us can relate to it) is that Qualcomm has a stake in the future of digital movies. Rather than sending reels of celluloid to movie theatres, digital files will be transmitted by satellite. Qualcomm may be coming to the theatre nearest you.
The various partnerships in place have potential also.
Sorry for the long post. Okay, so I'm not really sorry. I'm just trying to be polite about it. :)
--Mike Buckley
P. S. If you haven't gotten the idea, I will place a market order tonight that will add Qualcomm to my portfolio tomorrow. |
