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Technology Stocks : The New Qualcomm - a S&P500 company -- Ignore unavailable to you. Want to Upgrade?

To: quidditch who wrote (2114)	10/7/1999 9:51:00 PM
From: Ruffian	Read Replies (2) \| Respond to of 13582

Q The Next Microsoft?> Can Qualcomm Be The Next Microsoft? Its stock is on a tear, and fans act as if CEO Irwin Jacobs is the second coming of Bill Gates. Sure, Qualcomm's great. It's just not that great. There are those who liken wireless-equipment maker Qualcomm to Microsoft or Intel. They say that Qualcomm's headquarters in San Diego harbors an intellectual brain trust led by a visionary genius, CEO Irwin Jacobs. And they argue that Qualcomm's technological standard for wireless voice and data transmission will eventually dominate the business not only in the U.S. but also throughout the world. These true believers have been well rewarded this year. Since March, Qualcomm's turbulent stock has surged from around $35 to its current level of $190. Wall Street analysts now predict long-term revenue growth of 35% per year and have boosted the average earnings estimate for the year 2000 to $3.70 per share from $2.58 in April. Can Qualcomm realistically sustain that kind of growth? There's definitely more than hype at work here: Qualcomm is a company possessed of some unique assets. But whether comparisons to the software giant are warranted is another question entirely. Long the underdog, Qualcomm and founder Jacobs, 65, can now claim vindication from those who pooh-poohed its CDMA (code-division multiple access) wireless technology. Ex-professor Jacobs' bulldog tenacity earned him plenty of enemies as he battled one different standard in Europe and yet another that was adopted earlier in the U.S. by telecom giant AT&T. The tide turned in March, when Qualcomm forged an agreement with its premier antagonist, Ericsson. The deal quashed a pending legal battle over technology patents and cleared the way for Qualcomm's standard to play an integral part in the next generation of wireless networks. Also, Qualcomm sold Ericsson its money-losing infrastructure business, a move that immediately improved profit margins. While these moves have helped pump up Qualcomm's stock, sustaining that momentum has to come from within Qualcomm itself. Qualcomm's crown jewel is the 199 patents it holds on CDMA technology. License and royalty fees make up about 7% of its $3.3 billion in revenues, but they represent essentially pure profit. The CDMA technology was originally developed by the government for top-secret communications because it was impervious to jamming. Commercialized by Qualcomm, the technology tags packets of conversation with a unique numeric code. Multiple conversations are carried over the same frequency; then the packets are sorted and finally delivered to the appropriate party. The agreement with Ericsson will allow Qualcomm to reap royalty and license fees for years to come as its standard moves into other regions, such as Asia. There are also high hopes that Qualcomm's standard will be crucial in the development of the next generation of wireless networks, which will allow videoconferencing from cell phones. Although some argue this new royalty stream could come as early as next year, others are less sanguine. Mark Roberts, an analyst at First Union Capital Markets, estimates royalty revenues for Qualcomm will grow to as much as $450 million in 2000, but the next-generation network "isn't going to have any meaningful impact on revenues or earnings until 2002 or 2003." Another big revenue source, Qualcomm's semiconductor business, has been compared to Intel's. Qualcomm controls more than 90% of the market for CDMA chips and, like Intel, is praised for its innovativeness and ability to respond quickly to customer needs. But competition is lurking. Motorola announced in August that it plans to move into CDMA chips (for more on Motorola, see Investing). Analysts say Motorola will need time to ramp up production and note it has a spotty record when it comes to new-product development. "We believe Qualcomm, like Intel, will be able to maintain its distance between itself and its competitors" for some time, says Jim Hillary, a portfolio manager at Marsico Capital Management in Denver. If Qualcomm has an Achilles' heel, it's the handset business. In a partnership with Sony, Qualcomm was one of the first to build a CDMA handset and was among the earliest suppliers to carriers like Sprint. Now that Sony has stopped making U.S. handsets, some question whether Qualcomm can compete in this low-margin business. Qualcomm held 15% of the digital handset market at the end of the first quarter, second only to Nokia's 32%, according to Dataquest. But giants like Motorola, Nokia, and most likely Ericsson are eyeing the CDMA handset market. "If the right buyer came along, [Qualcomm] would sell the division," says Edward Snyder, a wireless-equipment analyst at Hambrecht & Quist. "It's more of a liability to the company now than a benefit." Qualcomm's management says it's "open minded" about its handset business, and even CEO Jacobs believes the consumer electronic kings--Samsung, Sanyo, and Toshiba--may eventually rule the market. "We think we need to be very flexible in our approach to the phone business in the future," says Tony Thornley, Qualcomm's CFO. Does any of this add up to the next Intel or Microsoft, or make Jacobs an elderly Bill Gates? It's a stretch. Qualcomm has high profit margins and fanatics love its stock, but it could learn a couple of things from Microsoft about handling the competition. On second thought, who really wants to be Microsoft these days anyway? INSIDE: The MP3 "revolution" is overhyped... A new column: The making of a Valley Man... Health care online... The Dreyfuss Report: PCs that think out of the box... Are stamps on the verge of extinction?... Alsop's summer vacation QUALCOMM CAN NOW CLAIM VINDICATION FROM THOSE WHO POOH-POOHED ITS WIRELESS TECHNOLOGY.