Aus and Thread: For the benefit of the SI readers, here is my latest newsletter comparing SNDK and QUALCOMM. Art
QUALCOMM, SANDISK
January 27, 2000
QUALCOMM first quarter earnings per share were $0.25, more than triple the same period last year. The company said that earnings for the current quarter, however, would level off because seasonal factors. That caution set in motion a selling frenzy, driving the shares down more than 18 percent and causing two major brokerage firms to downgrade the shares.
SANDISK quarterly net income almost tripled. The company said demand for its compact flash cards and multimedia cards was so great that orders are now backlogged until June. SNDK shares immediately jumped more than 10 points in extended hours trading yesterday, and this morning were over 125, a gain of more than 25 percent. Company officials also announced a two-for-one stock split in the form of a stock dividend to shareholders of record February 8. Both SanDisk and QUALCOMM had very strong earnings reports but very different investor reactions. The details below may help explain why.
ONE ANALYST, projecting QUALCOMM's future earnings, accepted the company estimate of $0.25 per share for the current quarter (same as last quarter) and came up with just $0.54 for the next two quarters, or a total for fiscal year 2000 of $1.04. His forecast means QCOM shares are now trading at about 118 times current estimated fiscal year earnings. Is this reasonable? Not if one reads the earnings statement closely and the comments made at the conference call following the release of earnings last Tuesday. As is often the case with technology stocks, the key to the puzzle is in the technology, not the dollar figures.
QUALCOMM has developed a chip for digital cellular phones that makes possible data access at rates faster than what most people with computers and modems are able to get over the phone lines. There is a surging demand for data access, not just in the U.S. but in Europe, Latin America, and especially China and Japan. In the conference call, QCOM Chairman Irwin Jacobs noted that no other company had a chip with this capability, and which was compatible with existing or future wireless digital facilities. The new chip is currently being supplied to Japanese and Korean manufacturers, and QUALCOMM expects it will also be used by ALL OTHERS, including the largest wireless phone companies - MOTOROLA, NOKIA, and ERICSSON. Since QUALCOMM has sold its money losing handset manufacturing business to KYOCERA, chips are the only things the company manufactures (other than good ideas). Without the drag on earnings from handset manufacturing, and with even greater licensing and royalty fees, combined with greater chip sales, QUALCOMM is in line to double or even triple its earnings again this year. Why is my estimate markedly different from that on Wall Street? Because the street is projecting comments on flat chip sales for the current quarter to the rest of the year, and is ignoring the continuing increase in royalties and the rapid deployment of data access capabilities. Put another way, it is very likely that within two years nearly every CDMA phone sold will have high speed data access and will contain a chip made by QUALCOMM.
A SECOND reason for optimism is derived from comments of Chairman Jacobs to the effect that CDMA business in China is expected to increase beginning later this year or early next year. The handset market in China exceeds 300 million (a conservative estimate for new subscribers during the next five years), or almost five times the TOTAL number of current CDMA subscribers worldwide. Why CDMA and not GSM, when both systems are currently in wide use, and GSM is actually more widely used currently than CDMA? Because CDMA results in fewer dropped calls, more reliability, and higher data access speeds. Again, it's the technology that makes the difference. Assume the health of the U.S. economy remains in good shape for the rest of the year, and interest rates do not rise more than about a half a point (a reasonable assumption). Assume also that, instead of a projected $1.04 per share earnings for this fiscal year, QCOM earns closer to $1.50 (not unreasonable, given the demand for data access), then the overall growth rate from year to year will be at a rate exceeding 100 percent. A price-earnings ratio of 120 to 150 under those conditions is well within reason, giving a stock price between 180 and 225. If there is an error here, it is on the low end. Conclusion: QUALCOMM remains a STRONG BUY.
SANDISK is a very different situation. Net income more than doubled for the full year. Total revenues from both products and royalties went from $136 million to $247 million. SNDK shares are priced about 16 times sales per share. Ordinarily, this ratio might be considered quite high, until one compares it to the numerous young technology companies selling at 150 to 250 times sales (forget about profits for most of these companies because it's all in the future). SanDisk also increased its cash on hand from $15 million to $146 million and its shareholder equity from $208 million to $572 million. In other words, SNDK shares have a book value of about $18, of which almost $5 is in cash. Book value, and the increase in book value is a good way to measure technology stocks, since what you are measuring is the increase in wealth. With a current price about 7 times book value, and with book value more than doubling from year to year, SanDisk is still a better value at 128 than most of the current group of high flying technology stocks.
WHAT THEN would be the differences in investor decisions to buy SanDisk or QUALCOMM? QUALCOMM, first of all, must be seen as a world company with a product that is essential to worldwide economic prosperity, and a product as useful to individuals as it is to business and government. It is to the 21st Century what electricity was to the 20th. SanDisk, despite rapid growth, aims at a more specialized area of technology - storage of data in digital form in a device that is small, rugged, permanent, and which requires no moving parts either to record or retrieve the data. Flash memory, while it has tremendous potential in both consumer and business applications, is still essentially a consumer item, subject to the whims of consumer sentiment as well as consumer well being.
AS FAR AS PRICE of the two stocks is concerned, SanDisk currently reflects the recent news of a stock split and terrific earnings. QUALCOMM reflects comments taken out of context and, in my view, misinterpreted by analysts, causing the stock to become undervalued in relation to other telecommunication stocks and more broadly, to the whole technology sector. At today's prices, QUALCOMM remains the better buy. A.S.B. |
