Merlin,
Sorry to change horses in the middle od the stream, but has anyone seen the article from Smart Money on the short interest in Q? You can pull it up by www.smartmoney.com I have tried to copy it and I'll see if it reproduces below. If this has been covered and I somehow missed it, my apologies everyone.
Joel
September 17, 1999
Why Are So Many Shorts Betting Against Qualcomm?
By Alec Appelbaum
YOU CAN BELIEVE in a company as deeply as you believe in
mom and apple pie. But when you buy stock in that company,
you're betting rather than buying certain results. And when
there are a lot of people betting against you, dramatic things
can happen to your stock. Qualcomm (QCOM), Wall Street's
wireless-hardware darling, has returned over 214% this year.
But more than 10% of its shares are under the thumb of short
sellers -- investors who have promised to sell shares they don't
own, expecting a drop in price. And after a week in which
Qualcomm announced plans to sell one of its major
businesses, the shorts are casting some pretty big shadows.
For today's screen, we're concerned with more than whether
Qualcomm makes a good long-term investment in wireless
communications. We also want to know whether its stock is a
candidate for a short squeeze. Remember, shorts have agreed
to sell stock they don't own. In a short squeeze, they have to
cover that position quickly after sudden good news, buying
stock before it rockets out of their price range. Their buying
tends to send the stock even higher. The question is not, are
the shorts right or wrong? The question is, are they going to
stop betting against the stock? In Qualcomm's case, the answer would appear to be no.
In today's screen (see recipe), we found companies with more than 10% of their market cap shorted, a
recent increase in short interest and high expectations for earnings growth in the next couple of quarters.
Qualcomm meets all those requirements, and it's vulnerable to what one analyst, speaking off the record,
calls the curse of fast-growing stocks: "Any tech stock that makes a strong move, people who are
negative about market sentiment will short it, hoping it rolls over." But Qualcomm is not just any stock.
Qualcomm's most important business consists of patents for a certain kind of advanced chip that allows
lots of wireless traffic to run across lots of radio spectrum. Soon, that will basically be its only business --
the company sold its infrastructure operations in a patent-dispute settlement with Ericsson (ERICY)
earlier this spring, and CEO Irwin Jacobs told analysts and reporters this week that it now plans to sell its
phone-manufacturing business by the end of the year. Margins in infrastructure and phones hadn't been
growing as fast as margins from royalties and service fees, and Qualcomm can little afford to disappoint
analysts who've come to expect intense earnings growth. (The stock tanked on Tuesday when an analyst
suggested that it might not beat growth expectations this quarter.) So, adios to those pesky
heavy-equipment businesses.
There are two ways of viewing this move. Analysts seem to view it as a
license to print money, pointing out that Qualcomm will get a royalty on
every phone that uses its chip design -- a design they say is the best for
sending data over wireless phones. Dale Pfau of CIBC Oppenheimer
raised his share-price target on Qualcomm to $250 this week for what he
calls a "pretty simple" reason: The company is now essentially a chip
manufacturer without any factories, making the potential profits on each of
its sales extraordinarily high. Of course, revenue will grow more slowly
because Qualcomm will have fewer businesses, but Pfau doesn't care.
"Profit is what you pay for in a wireless-hardware stock," he says.
Others view Qualcomm's approach as potentially suicidal. George Schmitt, a veteran executive with
wireless operator Omnipoint (OMPT), says the approach makes Qualcomm too vulnerable to schemers
who want to get around its patents and to short sellers who expect them to succeed. "If their whole
revenue comes from a royalty stream, and that disappears, then they are nothing," says Schmitt. Sure,
they have the leading technology now, but markets change, and Qualcomm must hope that its patent
and chip-design strength last. "That's not a company with a 200 multiple," says Schmitt.
For both Schmitt and Pfau, the real question will be Qualcomm's role when "3G" -- the next generation of
wireless-data service -- becomes widely available on phones and other devices. Pfau, like many of his
colleagues, argues that the future, however long it takes to arrive, will "converge to some kind of"
endorsement of Qualcomm's standard. Schmitt argues that the things people will want to do with their
wireless devices -- get and send email, do a little shopping, perhaps check a map -- won't require for
several years the kind of bandwidth that Qualcomm can harness. Now, Schmitt has a reason to think this
way -- he helped build his company around a different standard. But he may have a point. Dataquest
analyst Naqi Jaffrey says the speeds available from rival standards will be "good enough" to satisfy
customer demand through next year. After that, says Jaffrey, it's not at all clear whether demand will
emerge for, say, videoconferencing from your car -- the sort of thing Qualcomm's standard will allow.
Even if you accept that Qualcomm owns the future, Schmitt argues, you need a firm understanding of
how the future will change in order to ignore the short sellers. If he's right and the market doesn't demand
souped-up wireless data for two years or more, that theoretically leaves plenty of time for Lucent
Technologies (LU) and Motorola (MOT) to send their smartest engineers out to design chips that can
go around Qualcomm's patents. "None of us know" what new engineering will occur in the interim, insists
Schmitt.
Indeed, rivals line up every day. A new chip from Analog Devices (ADI), for example, will allow phones to
work without recharging for 1,000 hours -- and could, if it's produced and marketed properly, defer the
Qualcomm future to some degree.
Despite the short interest, Qualcomm remains something of an armor-plated stock. Its technology is
certainly strong, and Mark Roberts of Everen Securities says its stock price reflects robust demand for
its current generation of equipment. The stock rose 17% this week, after the announcement about the
phone-business sale and a management confab with analysts in New York. One off-the-record Qualcomm
bear sneered at the company's "PR machine" and accused it of having "analysts in its pocket," but Pfau
dismisses this talk, pointing out that the stock languished in a "trading range" for years, despite
energetic PR.
Certainly, Qualcomm could sail along quite nicely, as the analysts expect. Or the next big shift in
technology could leave it in a lurch, as the shorts are betting. And since even one share of Qualcomm is
an appreciable investment, investors shouldn't hold their breath for the salvation of a squeeze.
Well it reproduced half ass. You can see the report on the site |
