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

To: Ramsey Su who wrote (4660)	12/29/1999 8:33:00 PM
From: Jon Koplik	Read Replies (1) \| Respond to of 13582

To all - two page article on QCOM in 1/10/00 Forbes pps. 160-161. Jon. eom.

To: Ramsey Su who wrote (4660)	12/30/1999 3:12:00 PM
From: Ramsey Su	Read Replies (6) \| Respond to of 13582

Forget Paine Webber, here is the stuff from my shy friend. I think he said his target is 3000. Ramsey Below is part of a piece I wrote talking about three "legs" of value that support the "Qualcomm Stool" (I hope the scatalogically inclined will let that pass, it was just an analogy that came to mind at the time). I'm not going to have you post the part discussing the first and second legs, as anyone can make a spreadsheet and play with these numbers till they are blue in the face. Mine was a very agressive spreadsheet in which I was trying to get a feel for the upper bounds of Q's valuation and perhaps add some perspective to the recent price action in the stock. But my concept of the Third Leg might be of interest to some of the SI readers. Begin Excerpt... I should point out here that the valuation of Leg One - Royalties and Leg Two - Chipsets is very, very strongly influenced by our assumptions, particularly for cdma subscriber growth. In year 10 on my spreadsheet I have a figure of more than 1 billion units for the annual cdma devices sold. Is that reasonable? I don't know. If you ask ten experts you will probably get ten different answers, and this is where valuation turns to art and not science. In any case, as long as we recognize the uncertainty in these numbers perhaps we can learn something useful from them anyway. So, what's left? Other than a few smaller operations that we can safely ignore here, royalties and chips are Q's only businesses. What can be left to value? The Third Leg - The Great Unknown Analysts and commentators often stop here in their analysis and ignore completely something that can be a huge factor in valuing a company like Qualcomm. That is, the businesses or activities they will start up, buy, or otherwise enter in future years. We don't know what they are, but we know Q will do something with all that free cash flow coming out of royalties and chipsets. And for Q that cash is expected to be a big, big number over the next decade. Over the whole decade my admittedly aggressive spreadsheet has them accumulating (and presumably investing on behalf of shareholders) a total of more than $80 billion. If they do so even half as profitably as they have with their prior investments in cdma technology and chip designs, these investments will themselves generate a very large and growing stream of after-tax profits. If they can earn as much as 10% after-tax on invested funds, within a few years the investments will be throwing off earnings per share that I estimate at $2.55 in 2001, growing to more than $8 per share in 2004, and many times that amount late in the decade. This could be worth as much as an added $300 in per share value five years out, and much more than that further down the road. Can Qualcomm's management really find investments of sufficient quality and quantity to absorb all their free cash flow? Will they be able to manage these new activities or businesses profitably and thereby create large net additions to shareholder value? No one can really answer these questions. All we have to go on is their track record and what we know about their apparent skills and the set of opportunities they are likely to face. My opinion is that they bring enormous talents to the table and have considerable opportunity to apply that talent in wireless digital communications and related fields. After all, they created a $100 billion company with cumulative investments that are miniscule compared to what they will have available for investment in coming years. The third leg of Qualcomm's stool is the hardest to quantify but that makes it no less real or important to shareholder value than their future cash streams from royalties and chipsets. This great unknown is why we should probably hold on to Qualcomm, even if it seems overvalued from time to time.