Gregg Powers Interviewed>
Strategies
How Qualcomm evolved into a momentum
stock
Few stocks in recent memory have had a better year than wireless wonder
Qualcomm did in 1999. But what drove this phenomenal growth? We asked the
smart folks who saw it coming.
By Mike Robbins
Qualcomm, the wireless-communications company, might well be remembered
as one of the great technology stocks of the 1990s, but it sure didn't seem that
way 15 months ago. Back then, a word like unimpressive was a more-accurate
description than unstoppable.
"There were times in October 1998 when the stock was trading below its levels
of 1993," says Robert May, manager of the Trent Capital Equity Fund, the
mutual fund that owned the highest percentage of Qualcomm (QCOM) in early
1999, according to Morningstar.
But a lot can happen in a year. Qualcomm
posted an astonishing 2,619% gain in 1999,
before giving up some of those gains in early
2000. Seemingly overnight, Qualcomm was a
$100 billion company often mentioned in the
same breath as such technology blue-chips as Cisco Systems (CSCO) and
Sun Microsystems (SUNW). The rally was all the more stunning since
Qualcomm was no hot IPO, and hadn't even introduced a breakthrough
technology during the year.
So what happened? In this column, and in several more we plan to publish
every other Wednesday for the next couple of months, we'll try to explore
exactly how a stock makes the transition from value stock to growth stock to
momentum stock. It's largely unexplored territory, and we hope the detailed
and varied tales of success will help you understand both how stocks change
constituencies, and how you can find these stocks in transition as early in the
move as possible.
Rocketing to the moon
For Qualcomm, the moon launch can be reduced to one word -- or, more
accurately, an acronym: CDMA.
For the uninitiated, that's code division multiple access, a technology that
Qualcomm hopes will become to cellular communications what Windows is for
PCs. Interestingly, CDMA technology actually debuted in 1989, but Qualcomm
stock didn't feel its true impact until a decade later. Why now? There's little
debate that the first major catalyst was the resolution of a three-year-old
CDMA-related patent-infringement lawsuit against cell-phone giant Ericsson
(ERICY) in late March 1999. At the beginning of 1999, Qualcomm traded at
$6.41 (all prices adjusted for splits). As late as March 22, the stock was only
at $10.27. But after the Ericsson announcement, Qualcomm rocketed to
$21.22 by April 17.
The Ericsson agreement aided Qualcomm on a number of fronts. Ericsson
agreed to purchase Qualcomm's wireless infrastructure business, an earnings
growth laggard. Ericsson also agreed to recognize Qualcomm's patents on
CDMA, providing significant royalty income. But most importantly, Ericsson
was recast from vocal opponent of CDMA to powerful supporter. That fact more
than any other convinced Wall Street that the time was right to buy
Qualcomm.
"Up until March, Ericsson was always adamant in spreading misinformation
that Qualcomm and CDMA were unnecessary," says Gregg Powers, president
of Private Capital Management, long Qualcomm's top shareholder. "The market
was saying 'Qualcomm says one thing, Ericsson says another -- why should I
believe Qualcomm?' The agreement was an implicit admission of the necessity
of CDMA."
The battle over wireless standards
To understand why Ericsson's support of CDMA was so vital to Qualcomm
requires a quick primer in the high-stakes battle over wireless standards.
Most analysts agree that the cellular industry is likely to settle on a single
technology at some point in the future. The question is, which will it be? Until
1999, Qualcomm's CDMA seemed to many an unlikely choice: Its market
share was dwarfed by that of rival technologies TDMA (time division multiple
access) and GSM (global standard mobile). Even after 1999's gains, CDMA's
share of the market is still only around 10%. What's more, until the Ericsson
agreement, Qualcomm was fighting for CDMA virtually on its own against some
better-financed and better-positioned adversaries. But CDMA did have one
advantage: It widely is considered the superior technology for wireless data
transmission, a fact that became increasingly important as projections for the
wireless data market grew.
"I'd like to claim
that it was because
I had a 200 I.Q. But
after we did our
research,
Qualcomm's
potential was
obvious. Truth is,
anyone who put in
the time to do the
research could
have figured this
out."
-- Gregg Powers, president
of Private Capital
Management
Qualcomm's good news kept on coming
The Ericsson agreement wasn't the only factor weighing in Qualcomm's favor.
In early July, it was disclosed that the stock would be added to the S&P 500
Index ($INX), thereby drawing a slew of new cash from index investors. In
mid-July, the firm topped analysts' quarterly earnings estimates. On Nov. 2,
Qualcomm CEO Irwin Jacobs announced that the company would top earning
expectations for the sixth consecutive quarter, and that same day announced
that the stock would not just split for the second time in 1999, but split 4-for-1.
When Jacobs made his Nov. 2 announcement, the stock was trading at
$56.20. By year's end, it was at $176.13. "It has been another eventful year for
Qualcomm," Jacobs said in November, a bit of an understatement.
The fortunate few
A lot of investors made a lot of money in Qualcomm in 1999. But few did better
than those who bought the stock before takeoff and held it through the year's
end. High on that list are Gregg Powers and Robert May. What did Powers and
May see that so many of the rest of us missed?
"We're value investors," says Powers. "We found an undervalued asset." That's
right: The biggest shareholder in one of 1999's hottest high-tech momentum
stocks was a value shop. "We felt that Qualcomm's technology was
quantitatively and qualitatively superior to the competitors, and that its market
cap didn't reflect that," he says. "So we bought shares four or five years ago,
and hung in there. We were convinced that CDMA would become the industry
standard."
For his part, May never was certain that CDMA would win in the end -- but he
liked its chances and considered the gamble worth taking. "We saw a small
company with a world-class patented technology," he explains. "Qualcomm
was a $4 billion company while the Ciscos and Lucents of the world were in
the $100 billion-to-$200 billion range. True, the best technology doesn't always
win -- Beta was better than VHS and a lot of people think Windows wasn't the
best operating system, but it was a good risk."
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Of course it takes more than a hunch. Powers estimates that Private Capital
Management invested up to 1,000 hours researching the matter. Much of this
time was spent contacting everyone the firm could reach in the wireless
communications field to find out how the insiders handicapped CDMA and its
competitors. "It was a matter of knowing who to believe," he says. "When
Ericsson said that Qualcomm's patented technology was not vital, I kept
digging. What I found was that people who ought to know what they're talking
about laughed when they heard comments like this from Ericsson."
Powers and May also saw that the future of wireless communications was
likely to lean toward data transmission. "With wireless data capabilities, you're
no longer talking about 30%, 40%, 50% penetration," says Powers. "Suddenly
it's 300%, 400%, 500% penetration. It's not just handsets; it's redefining the
possibilities."
Next stocks on the agenda
Qualcomm is no longer that rarest of rarities, the under-appreciated tech stock.
But both Powers and May see others:
Powers mentions Imation (IMN), a collection of 18 businesses spun off from
3M (MMM) in 1996. "We spent months peeling through the businesses, and
among the 18, some were just dynamite," he explains. "[CEO] Bill Monahan
has done a wonderful job of selling off unprofitable businesses and sharpening
the company's focus."
That focus has become high-end data-storage media such as disks and tapes.
Imation is the dominant vendor of such products for a number of popular
data-storage devices. "The key to Imation is that they're what's backing up all
the info coming off the Internet," says Powers. "As long as the Internet grows,
it has to be archived somewhere."
Powers, who maintains the conservative nature of a value investor, if not the
aversion to tech shares, is careful to add that Imation is a long-term play, and
that no one should expect it to match Qualcomm's blistering 1999.
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May's choice is go.com (GO), a relative underachiever by Internet stock
standards. "Go.com is seen as a portal, and portals have lagged a bit," he
explains. "But that isn't really what it is. The Internet's going to become the
entertainment provider in the not-too-distant future, and go.com will be the site
to provide access to Disney, ESPN, ABC and the rest of the content controlled
by the company."
Since go.com is controlled by Walt Disney (DIS), that's a reasonable
conclusion. And in May's eye, that makes go.com a bargain.
What did it take to spot Qualcomm before the crowd? It required a certain
understanding of wireless technology, the resolve to hang with a laggard stock
throughout the mid 1990s, and the willingness to bet on a technology that,
despite its promise, was no sure thing. But both Powers and May conclude
that this was a stock opportunity that could have been uncovered by anyone
willing to put in the work.
"I'd like to claim that it was because I had a 200 I.Q.," says Powers. "But after
we did our research, Qualcomm's potential was obvious. Truth is, anyone who
put in the time to do the research could have figured this out."
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