Regarding gross margins, I do not see this as an issue at all. The following is from a post I wrote on the "Gorilla and Kings" thread to answer someone's concerns about margins:
"...As a result, they generate meager 3% gross margins..."
Keep in mind that QCOM has recently shed two of thier money losing ventures. They spun off Leap Wireless (LWIN) in October and have now sold the infrastructure division. Both of these ventures fulfilled strategic goals, but were large negatives on the balance sheet. With the disposal of these two net income draining items, the substantial increase in almost 100% margin royalties, and an increase in ASICS and phone sales, gross margins will explode.
Legal expenses from the lawsuit with Ericsson were also affecting the bottom line, thus hurting margins, though I have no idea to what extent. Now that the suit is settled, the money that was going to the lawyers can now go directly to the bottom line, and eventually into our pockets.
Do not overlook that this company has numerous "hidden" value items that are not necessarily reflected in the share price. OMNITRACKS is a cash cow and growing, especially internationally. Eudora is one of the most popular e-mail programs.
WirelessKnowledge, a joint venture with Microsoft will probably be spun off in the next year or two. Globalstar service should launch this year (QCOM has 7% ownership and major equipment supply contracts). CineComm was a total surprise to most of us at the most recent annual meeting, but Dr. J seems to think it has tremendous potential. They have some military/government contracts, although they are highly classifed and not talked about often.
All the above are emerging businesses in their own right and can be expected to contribute to earnings as they develop and start making net profits.
QCOM also has a large R & D budget, allowing them to come out with new surprises fairly often. Who knows what else they are working on? I strongly agree with Michael Murphy, editor of the California Technology Stock Letter, that R & D is the lifeblood of the high techs and should be added back into net income as it is more of an investment that increases shareholder value than an expense.
(Ironically, Michael Murphy did not believe in the Q. I asked him his opinion on QCOM at an investors conference he spoke at a couple of years ago, and he was pretty doubtful about CDMA. His book "Every investor's guide to high-tech stocks& mutual funds" mentions QCOM and CDMA most unfavorably. I told him he was wrong about the Q as he was signing my copy of his book! But I do agree with his methodology in valuing high tech stocks).
For all of these reasons, I do not feel that past gross margins are an effective barometer to determine QCOMs future potential or its membership in the Gorilla family. |
