SMARTMONEY.COM: Qualcomm Doesn't Speak Chinese - Yet
By ALEC APPELBAUM
(This report was originally published late Monday.)
NEW YORK -- American paranoids have referred to China as 'an inscrutable country.' How fitting, then, that news from Beijing has roiled Qualcomm (QCOM), an inscrutable stock.
Investors bid Qualcomm up by 1,400% in 1999 on hopes that its chips and its patented intellectual property in them could ring up profits with every cell-phone sale of the future. Most investors didn't understand how CDMA (code division multiple access) would make wireless calling and emailing more efficient, but experts generally agreed that it would. And that was all it took to power the stock.
But as the Nasdaq fell, so did Qualcomm. So far this year, the stock is down 60% - and looking for relief. One source of said relief could have been a deal with China Unicom, a state-sponsored phone operator in the world's most populous nation. In February, Unicom suggested that it might use CDMA for its new network. But Monday morning, news that the Chinese would instead use an older technology did more to sink Qualcomm than buoy it.
And that was an overreaction.
Lehman Brothers analyst Tim Luke, on a conference call with clients Monday morning, suggested that Qualcomm is still very much in the picture. Luke, fresh from a tour of China, Korea and Japan, relayed that China Unicom spokespeople had mentioned plans to examine CDMA technology in a limited way, which would make at least some use of Qualcomm intellectual property likely in the next two years. What's more, Unicom also plans to use Qualcomm's CDMA formula no later than 2003, reinforcing the technology's long-term appeal. By the end of the conversation, Luke called Qualcomm the company best positioned to benefit from CDMA's growth.
Still, Luke left Qualcomm off his recent list of cell-phone-maker Buys. He talked up Ericsson (ERICY) and Nokia (NOK), which compete with Qualcomm in the licensing of technology, and reiterated Buy ratings on Cisco Systems (CSCO) and Nortel Networks (NT), big manufacturers of equipment for wireless networks. But no Qualcomm.
Indeed, nobody ever knew when or how China Unicom would use CDMA. Back in February, we explained how the company faced many obstacles of its own, including insecure investors and a tiny base of current users.
What's more, at least one industry observer says China Unicom's original overtures 'may have been a ploy' to attract investors who were then smitten with Qualcomm and CDMA. Farpoint Group analyst Craig Mathias, who attended the January conference at which China Unicom said it would look at CDMA, says such mischief 'is not unheard of.' Mathias, who shrugged off today's news, calls it irrelevant to prospects for CDMA adoption in China.
Qualcomm holds many patents on CDMA technology, which lets wireless phone companies carry lots of calls and messages at once without sacrificing sound quality or speed. While many different flavors of CDMA lend themselves to different populations and terrains, Qualcomm figures to fight for royalty revenues from most of them (including TS-CDMA, which Chinese scientists are trying to develop). Back when they were inflating Qualcomm stock, investors may have expected a simple toll collection every time somebody bought a phone. The likely future is more complicated, explains Mathias, and will involve contracts and lawyering to determine exactly where Qualcomm will get paid. But it's also lucrative. According to Matt Hoffman of Wit SoundView, a conservative estimate of future royalty revenue - assuming no money from China Unicom until 2003 - pegs $8.9 billion in revenue by 2010.
'This stock, which was priced for perfection, was set to stumble,' wrote Hoffman in a note to clients Monday morning. Qualcomm stock got so frothy late last year that any good news caused the price to hop upward. In today's more bearish climate, the inverse seems to be true. Hoffman urged investors to buy the stock on (relative) weakness Monday.
Of course, a cold shoulder from China Unicom could pinch Qualcomm's actual results. Wojtek Uzdelewicz, a Wall Street Journal All-Star analyst with Bear Stearns, warned clients last week that a lack of business in China could combine with recent bans on phone subsidies in Korea to produce Qualcomm 2001 earnings five to 10 cents below what he had expected earlier. But he stresses that this represents a worst-case scenario and that there is a good chance of CDMA finding a home in China in 2001.
So little in analysts' overall outlook has soured. 'Qualcomm will still benefit from' CDMA adoption, says Mathias, as much as was likely when it traded at 194 times last years' earnings. (That ratio has sunk to around 90.) Its prospects are as risky as ever, fraught with political and competitive uncertainty. But if the stock could only head downward just a few months ago, now at least it has plenty of room to rise.
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