Joel- Smart -Money>
To: Jon Koplik (41849 )
From: ruffian
Sunday, Sep 19 1999 1:49PM ET
Reply # of 41886
WSJ- The Shorts And Q>
September 17, 1999
SMARTMONEY DAILY SCREEN: Shorts
Betting Against Qualcomm
By ALEC APPELBAUM
Smartmoney.com
NEW YORK -- 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 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, called 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.
I ndeed, 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 the lurch, as the s horts
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.
For more information and analysis of companies and mutual funds, visit
SmartMoney.com at smartmoney.com
Briefing Book for: QCOM |
