Tracking Qualcomm's Adventurous Ascent to the Top Tiers of Trading
By Scott Moritz
Staff Reporter
11/19/99 3:11 PM ET
After years of waiting, Qualcomm (QCOM:Nasdaq) launched on March 25.
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In late March, Qualcomm and rival Ericsson (ERICY:Nasdaq ADR) ended a three-year legal battle, removing a significant burden from Qualcomm and clearing a path for its code division multiple access wireless technology to become a new-generation domestic industry standard.
The stock rose 13% the day of the Ericsson settlement, then another 13% the next day. By April 21, it had more than doubled.
And it just kept going from there. Now it's up more than 700% since March 25, trading around a stunning 350 a share. After seven years of stock charts resembling a corpse's EKG, Qualcomm shares have now risen some 8,000%.
Early investors are in awe. Investors who jumped in just a month ago are jubilant as well. And, of course, momentum investors have climbed aboard, further fueling the rise. Even Joan Jacobs, wife of Qualcomm Chairman Irwin Jacobs, has had to adjust to Qualcomm becoming the hottest of hot stocks. "I think everyone knows about us now," she says. "Even my hairdresser is asking me for advice. 'I'd go to jail' is my favorite response."
To be sure, there's plenty of debate about whether Qualcomm, which makes CDMA chips and collects royalties on CDMA licenses, is just another bubble, albeit a mighty big one. Its price-to-earnings ratio is 143, surpassing Nokia's (NOK:NYSE ADR) 110 and nearly doubling Ericsson's 79. Qualcomm's many fans contend the stock deserves this premium multiple because it owns a potentially lucrative technology, while Nokia and Ericsson simply make phones using technologies licensed from other companies.
But a look at the basics of some of the factors that pushed up Qualcomm's stock tells a story of how investors, already in love with tech -- especially with companies involved in telecommunications and the Internet -- are desperately searching for home runs and how they'll bet on a presumed favorite, regardless of its track record. It also shows how quickly momentum can build behind a stock in today's market.
Cracking the Code
Qualcomm first demonstrated CDMA 10 years ago. At the time, CDMA was just one of a number of digital transmission standards aimed at boosting capacity on conventional analog lines. Co-founder Jacobs, a respected intellect on technology matters, seemed at times the lone voice touting CDMA. Rival technologies TDMA, or time division multiple access, and its kin GSM, or global system for mobile communications, were gaining far wider acceptance. By 1997, GSM had 35 million users, most of them in Europe. That same year, CDMA had just 4 million users.
San Diego-based Qualcomm had been, by many accounts, a dud. Investors regarded it as a highly speculative stock with a track record of testing Wall Street's patience.
Change of Direction
At Qualcomm, seven years of glacial progress -- and a nearly vertical 1999
Charles Balas, a telecom analyst who follows Qualcomm for Fiduciary Trust Co. International in New York, held a significant position in Qualcomm in the early '90s but bailed out in 1995 after the company reported weak earnings.
"If it wasn't for that earnings hiccup in 1995, I'd probably still be in it," says Balas, who's astonished by the stock's performance and what he calls a steady flow of positive news.
In and Out
Little else happened until March and the Ericsson settlement. A key part of that settlement involved Ericsson buying Qualcomm's money-losing infrastructure business, which helped Qualcomm put together back-to-back positive earnings surprises.
In September, Qualcomm said it was shedding another unprofitable unit, its handset-manufacturing business. Around this time, Bruno Lippens, an analyst with Belgium's Bank Dewaay, was waiting to pounce. He'd been watching Qualcomm for months, hoping for a dip. It didn't come, so he bought in at 180.
Last month, the company reported that royalty revenue for the quarter doubled to $113 million from a year ago. Analysts say that even though royalties make up only some 10% of revenue, which was $1.06 billion last quarter, its tiny costs create high margins. Jacobs estimates that as many as 80 million CDMA phones will be sold next year, nearly doubling the 40 million that are expected to be sold this year. Worldwide, there are currently 200 million GSM users, 40 million CDMA users and 33 million TDMA users.
And earlier this month, Qualcomm demonstrated a high-speed wireless data transmission technology that in trials rivaled speeds of current cable modem and digital phone line services. Analysts note that Qualcomm controls nearly 90% of the world's CDMA chip market and that there is a potentially high demand for chips that enable phones and other handheld devices to act more like computers with access the Internet.
Phoning Frenzy
These days, it's hard to miss the frenzy of wireless Internet offerings being advertised by CDMA carriers such as Sprint PCS (PCS:NYSE), GTE (GTE:NYSE) and Vodafone AirTouch (VOD:NYSE ADR), to name a few.
"Owning the CDMA patent makes this a Microsoft (MSFT:Nasdaq) story," says Bank Dewaay's Lippens. "Just like every time Compaq (CPQ:NYSE) or Hewlett-Packard (HWP:NYSE) makes a computer and loads it with Windows, it's money for Microsoft. Same with Qualcomm -- every time Ericsson or Nokia makes a new phone, a check goes to Qualcomm."
Add to this the fact that nearly all projections indicate that the U.S., Europe and Asia are increasingly cutting cords and going wireless.
The Zoo
So Wednesday at a Warburg Dillon Read conference at New York's Pierre Hotel, investors were standing shoulder to shoulder in the back of the overfilled pink marble ballroom to hear the Qualcomm story.
A few who were already in the stock were hoping to get a progress report. Others, said one money manager who asked not to be named, "are probably here because they need to get Qualcomm into their large-cap growth funds." The money manager said he has held a large Qualcomm position for 3 1/2 years.
Jacobs began his understated delivery with the classic "It's been a very exciting year." He then proceeded with a fairly shopworn, Joe Friday presentation: products, profits, projections. He made no acknowledgement that -- after years of toiling away in the CDMA wilderness -- Qualcomm was pleased to find Wall Street knocking loudly at its door.
As Jacobs departed for the breakout session afterward, about 25 attendees crowded around the man, offering their cards -- a bit like kids trying to get a ballplayer's autograph after a game.
For his part, Jacobs downplays some of the bolder talk, such as the Microsoft comparison. But he doesn't play down Qualcomm's potential. "Microsoft was in an admirable position and did exceedingly well, aside from their legal troubles," he says. "But I wouldn't make that comparison myself. I think we are on a really great path of our own."
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