Dump Qualcomm? Not So Fast
By Glenn S. Curtis, Columnist
Qualcomm has taken some hits, but its name remains synonymous with wireless.
This is a good time to buy.
Qualcomm (Nasdaq:QCOM - news), the well-known maker of chips and other wireless telephone components, has taken a
beating recently as analysts reduced sales expectations in South Korea.
This came on the heels of a ruling by the government of South Korea that phone-service providers must end subsidies for cell
phone sales. Just last week, China United Telecommunications, or Unicom, announced that it had delayed construction of a
network based on Qualcomm's CDMA (Code Division Multiple Access) technology for two years.
Based on all this, investors might as well put in their sell orders right? Not so fast.
To be sure, momentum is working against the shares right now. But the company still has a great deal to offer. Logic would
state that the stock is likely to rebound a few points after dropping 25% over the past two trading days; indeed, the stock is up
4 1/2 points, or 6.5%, midday Friday at 65 1/2.
That said, the shares are likely to languish until investors begin to focus on opportunities that are two to five years out.
Translation: For buy-and-hold investors this sell-off presents a great buying opportunity. Day traders ought to stay away for
now.
For those still on the sidelines, let's take a look at some of the positives and negatives surrounding a potential investment in
Qualcomm:
Qualcomm Pro's
Wireless devices are synonymous with Qualcomm. Throughout the world, demand for high-speed wireless technology and the
stuff we simply can't do without, like cell phones and e-mail, remains strong. Qualcomm has the technology to ensure that
people will continue to communicate and compute at an ever-faster pace.
To that end the company has perfected parts and products based on the CDMA technology that allow for cellular users to get
better reception and greater privacy. CDMA also greatly reduces the chance that your cell phone might be cloned. It provides
a greater capacity (a number of subscribers can use the same frequency), and over the long haul, allows for a lower-cost
phone.
Qualcomm is not resting its laurels when it comes to the future of the Internet. The company recently signed a licensing deal with
Novatel Wireless. This deal will enable the development of Internet connectivity products that will one day allow me to
telecommute from the beach in Bermuda. Although this agreement hasn't been quantified in terms of dollars and cents, similar
deals will help solidify Qualcomm's future as a middle man, and an essential component in the future of wireless.
Another big opportunity lies in China. But this huge market currently has an equally large question mark hanging over it. If China
ever fully embraces Qualcomm's technology, look out. As China's entry into the World Trade Organization (WTO) is solidified,
some think that we will see movement by the government on the adoption of CDMA technology.
But given the uncertainty in China at this point, I think that few if any of the analysts that provide active coverage on the stock
have factored the potential of China into their models. In short, the potential in this region should serve merely as a potential
icing on the cake.
Qualcomm's Con's
One could make the case that with almost half of the 50 million-plus people worldwide using CDMA-type phones living in
South Korea, this week's news could mean trouble. Some have stated that this could lead to a retail price increase of phones in
that nation by $170 or more. Chase H&Q analyst Edward Snyder was adamant in a recent research report that this is likely to
retard subscriber growth, and I can't argue with that.
Further, the company's 6.5% interest in Globalstar Telecommunications (Nasdaq:GSTRF - news), a satellite phone company
that's rapidly running out of cash, could come back to haunt it. Although Globalstar has about 44 satellites spinning in space
right now, without some financial backing in the near future the company may be forced, as Iridium was, to file for bankruptcy.
Even if a white knight does emerge the question regarding Globalstar's ability to grow on a profitable basis will continue to
linger.
If Globalstar goes the way of the dodo, what will it cost Qualcomm? Factoring in accounts receivables outstanding, the equity
interest, and other related financing, somewhere north of $750 million. But I think that this news has already been factored into
the stock.
Follow the Money
Qualcomm has been regarded over the past year by fund managers as a must have, and managers have been stepping over
each other to accumulate shares. In the March quarter institutions picked up a net of 31 million shares, putting overall
institutional ownership at the end of the quarter at 41.5%. Barclays Global Investors and Janus Capital were particularly big
buyers of the stock, according to data provided by Lionshares.com.
With the current shift in the company's fortunes, I expect that buying to slow; institutions could even turn net sellers in the
current quarter due to needs by fund managers to get the stock off their books. But the long-term trends of expanding wireless
connectivity and the explosion of wireless components mean that that the company is far from dead.
Final Thoughts
The Street is expecting Qualcomm to earn $1.08 per share in 2000. Some had been expecting the company to earn $1.42 per
share in 2001. But because of the situation in Korea these estimates have come down to the mid $1.20s. Because earnings are
expected to accelerate at a lower rate than previously expected, I expect the stock to be under pressure for some time.
This is likely to be exacerbated by the herd mentality that has surrounded this stock. With these factors in mind I would at the
very least continue to hold the stock. For those a little more bold, now appears to be a great time to be accumulating shares.
Glenn Curtis is an analyst for worldlyinvestor.com. Prior to working at worldlyinvestor.com, he was an analyst at
InsiderTrader.com, a financial Web site, and at Cantone Research, a brokerage firm in central New Jersey. Glenn is
series 6, 7, 24, and 63 licensed.
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