SSB 6/15 reopot on wireless & QCOM.
JohnG
Going Wireless on the Information Superhighway
Qualcomm Inc(QCOM)*
Rating: 1H
As of 06/15/2000
Last Changed 03/31/2000
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Salomon Smith Barney ~ June 15, 2000
Equity Strategy
Going Wireless on the Information Superhighway
June 15, 2000 SUMMARY
* We believe wireless and telecommunications equipment
A. Marshall Acuff providers are at the forefront of a universal change and
convergence of Internet and wireless technologies.
* Robust growth in worldwide subscriber base and handsets
Ralph Giacobbe should provide a positive catalyst for industry players.
* The implementation of new technologies, such as 3G,
should also play a key role in the buildout and upgrading
of existing networks.
* We highlight Sprint PCS and Voicestream in the wireless
services space and Ericsson, Motorola, Nokia, and
QUALCOMM in telecom equipment.
OPINION
*Please refer to the June 15, 2000 issue of the Portfolio Strategist for any
referenced figures*
Wireless and telecommunications equipment providers represent a key part of
the Information Superhighway, which we introduced as an investment theme four
years ago. At this point, many stocks in this group, like those in the other
technology and communications sectors, have recovered part of the setbacks
they endured during the market's April correction. But most of the stocks
have not re-attained their previous highs, and we believe positive
fundamentals will provide the necessary catalyst to move industry players
forward.
For wireless and telecommunications equipment providers, the sector is in its
sweet spot, in our opinion. We expect the robust growth of the past several
years to accelerate as the Internet converges with wireless in what analyst
Michael Rollins calls the "Wireless Information Age." He is referring not
only to cellular phones but also to sophisticated handheld devices that can
quickly retrieve information and deliver it in real time to any location. In
the future, wireless operators will need to supply higher and higher speeds
for data access in order to remain competitive.
Explosive Growth
We expect dynamic growth in wireless Internet in the next several years. The
worldwide wireless subscriber base is expected to reach 1.2 billion by 2003,
compared with approximately 470 million at the end of 1999 (Figure 1). This
would tend to reflect lower pricing due to competition and increased network
coverage to allow more access in more places. Handsets are projected to
total 1 billion in 2003, more than 3.5 times 1999 levels (Figure 2). This
includes replacements by subscribers who will need new phones for optimized
mobile data retrieval, as well as for product enhancements such as prolonged
battery life and added functionality.
The handset market is dominated by three global players:
NokiaMotorolaEricsson
The relatively low penetration of wireless services in the United States
should provide another compelling growth catalyst for wireless. The United
States is currently lagging many European and Asian countries in penetration,
although the subscriber base of the total addressable market here is the
largest in the world. Rollins believes U.S. penetration levels should more
than double to nearly 70% by 2007, an 11% compounded annual growth rate from
1999 levels (Figure 3). It is also likely that as penetration grows,
wireless will begin gaining share of voice traffic from wireline networks,
which would represent another potential positive. Figure 4 shows the total
number of minutes used on both wireline and wireless communications,
projected through 2005. From 1999 to 2005, the number of wireless minutes is
projected to increase 225% versus only 12% for wireline minutes.
In the wireless space, we would focus on Sprint PCSVoicestream
The three dominant players in telecom equipment are Ericsson, Motorola, and
Nokia. Ericsson seems well positioned in the wireless infrastructure market,
with 80% of its business in wireless-related areas. The company should be a
major beneficiary of the migration to 3G technology. Motorola is a worldwide
leader in the wireless equipment market as well as in the electronics
equipment, components, and services markets. The improvement in Motorola's
mobile phone business and impressive product portfolio, which could be three
times greater than it was in the last Christmas selling season, should
provide continued strength in its business. Nokia is the No. 1 player in the
mobile phone market and a leader in wireless infrastructure, specifically GSM
technology. We believe Nokia will become another beneficiary of the
migration to 3G as it hopes to win its fair share of 3G contracts in the next
one to two years.
We would also highlight QUALCOMM, which is a pure play on the explosive CDMA
(code division multiple access) digital wireless technology. Its CDMA
technology is recognized all over the world and gaining share. The company
also profits from royalties it receives from manufacturers that sell CDMA-
based equipment. Recently, there has been negative news regarding China's
reported decision not to deploy CDMA technology. Cena believes that CDMA
will ultimately be deployed in China, as the logical migration path from GSM
to 3G is through CDMA. Moreover, he views China as potential upside to the
QCOM story and does not include it in his current forecast.
Bottom Line
Wireless and telecommunications equipment providers are at the forefront of a
universal change and convergence of Internet and wireless technologies. The
growth potential behind these sectors should provide a positive catalyst
allowing companies to leverage this growth over the long term. We agree with
Cena that a basket approach in this area is best. We believe the future
holds tremendous opportunities in this space which will allow for lots of
winners. We highlight Ericsson, Motorola, Nokia, and QUALCOMM in the
telecommunications equipment space and Sprint PCS and Voicestream in the
wireless services space.
Price
Company Ticker 6/13/00 Rating
Telecommunications Equipment
Ericsson (LM) Telephone Co ERICY $23 1M
Motorola, Inc. MOT 34 2M
Nokia Corporation NOK 59 1M
Wireless Services
Sprint PCS PCS 61 1H
Voicestream VSTR 126 1S
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