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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: MileHigh who wrote (42667)	9/28/1999 1:11:00 AM
From: The Reaper	Read Replies (5) \| Respond to of 152472

For anyone who cares...here's the report from H & Q. Same tired B.S. this guy has been espousing since the stock was 120. ** Hambrecht & Quist Hambrecht & Quist Hambrecht & Quist ** Company: QUALCOMM Inc. Price: 195 Recommendation: Market Perform Notes: a, f Date: 9/27/99 QCOM Looking To Exit Phones, Will Likely Feel Pressure in Chips and Royalties We believe Qualcomm's move to sell its handset division in response to rapidly declining ASPs is the latest manifestation of the new competitive environment. We expect this will likely be followed by a decline in ASIC sales and slowing in the growth in royalties as ASP's continue to decline. Divesting the handset business will eliminate a large liability to earnings but could prove costly if the new owners do not continue to use Qualcomm's ASICs or commence paying royalties on what were previously, royalty-free phone sales. Maintain Market Perform. 1998 A 1999 E 2000 E Q1 EPS $0.29 $0.33 $0.79 Q2 EPS 0.13 0.41 0.69 Q3 EPS 0.17 0.75 0.60 Q4 EPS 0.27 0.84 0.62 FY EPS 0.86 2.33 2.70 FY REVS (M) 3,348 3,982 4,452 CY EPS 0.90 2.79 2.39 CY P/E NM 69.9 81.5 FY Ends Sep Current Price $195 52-Week Range $19 -199 Market Cap (M) $36,698 Shares Out (M) 188.253 Book Value $7.50 Net Cash/Share $2.39 2-Year EPS Growth 16% CY00 P/E-to-Growth 507% Handset Pricing Under Pressure Pricing for Qualcomm's line of cdmaOne handsets is declining much faster than the company had expected. We believe pricing on Qualcomm's phones is declining faster than the industry as a whole, and that industry wide pricing is declining faster than the company expected. We believe accelerating price erosion is the simply a result of the new competitive environment and will be exacerbated by an over supply of handsets likely to hit the market over the next two quarters. In addition to pressuring Qualcomm's handset margins, price erosion will also dampen growth in the company's royalty revenues and eventually pressure chip pricing. Losses in Qualcomm's handset business could more than offset growth in royalties. Like Ericsson last year, Qualcomm will likely face significant losses in the near future as the company is forced to slash phone pricing to maintain unit volume. Moreover, component shortages will bolster the cost of goods further pressuring handset margins. At approximately 45% of total revenue, small negative margins in handset can result in large losses that could more than offset growth in royalty revenue. Selling the handset business may prove more difficult and costly than expected. The company's previous guidance of single-digit positive operating margins in handsets assumed the core ASIC was transferred at cost and no royalties were paid on phone sales. If the business is sold to an OEM that does not use Qualcomm's ASICs, Qualcomm will loses out on the sale of about 7 million chips a year - nearly 20% of total ASIC sales. If the company charges royalties and sells ASICs at market rates, the new owner will incur significantly greater losses than Qualcomm is currently experiencing making the sale of this business problematic. We expect the company will follow the same approach it did with Ericsson and the infrastructure group, that is, sell at a steep discount to book value, take a large one-time charge and move on. Unloading the handset business may improve fortunes in the near term but will not stave-off ASIC market share losses in 2000. We believe increased handset competition from Nokia and Motorola - both of which have developed their own cdmaOne ASIC, will continue to cut into Qualcomm's market share in chips. This combined with an oversupply of handsets and the entry of DSP Communications, Prairie Com and Motorola into the cdmaOne ASIC market will increase margin pressure on Qualcomm's lucrative chip business. Currently the company expects ASIC pricing will stabilize around $20 even in the face of new competition in both chips and phones. We believe cdmaOne chip prices will likely approach those of GSM ASICs which are now in the $10 range. Steep price declines in chips combined with market share losses to new players would significantly reduce margins and earnings growth in chips. At $195, the stock is trading at 72 times our new FY2000 estimate of $2.70 which is a large premium to its 16% EPS growth rate. A Pro Forma analysis of operations without the handset business suggests that earnings could growth to about $3.50 next year, although most of this growth would come from one-time gains from the divestiture of the handset operations. Even with this performance however, the stock would be trading at 56 times Pro Forma FY2000 estimates which is still a premium to its year-to-year earnings growth of 50%. More importantly, we expect competitive pressures will slow earnings growth for 2001 and that the stock is trading at a premium to its fundamentals. Maintain Market Perform. 1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information contained herein is based on sources believed to be reliable but is neither all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at this time and are subject to change. We do not undertake to advise you of changes in our opinion or information. In the course of our regular business, we may be long or short in the securities mentioned and may make purchases and/or sales of them from time to time in the open market, as a market maker, or otherwise. In addition, we may perform or seek to perform investment banking services for the issuers of these securities. Most of the companies we follow are emerging and mid-size growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. For these and other reasons, the investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. This report is not a recommendation or a solicitation that any particular investor should purchase or sell any particular security in any amount, or at all. on suitability considerations, please contact your account executive. RESEARCH NOTES: H&Q publishes brief Research Notes covering very recent or developing events or situations regarding companies or industries covered. These reports are made available to interested clients of H&Q on a request basis. They often contain only partial information in very brief, often in outline form; their purpose is to provide rapid information and preliminary evaluations of such events or situations which may very rapidly be changed as a result of subsequent additional information and analysis. Please contact your Note Legend: (a) Hambrecht & Quist LLC maintains a market in these stocks. (b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or has privately placed securities of these companies within the last three years. (c) Hambrecht & Quist LLC has an investment position in these companies. (d) A Hambrecht & Quist LLC employee is a director of these firms. (e) The analysts covering these stocks have investment position. (f) Options are available on these issues. (g) Entities associated with Hambrecht & Quist LLC have an aggregate beneficial ownership of more than 5% of the outstanding equity securities of these companies. (h) Hambrecht & Quist acts as a financial advisor to this company. (r) Restricted. No recommendation at this time. May, but does not necessarily, designate company in registration. All rights reserved. 888.558.2500 I especially like his estimates for the 3rd and 4th fiscal quarters for FY2000. Those estimates don't even cover the royalties and licensing fees that Q! will be realizing, let alone ANY market share for ASIC's. What a dumb ass! kirby