Friday June 16, 9:00 am Eastern Time
Individual Investor
Qualcomm's Latest Woes Trouble Fund Managers
By: Judith Graham (06/16/00)
Prompted by news that two analysts recently cut their earnings estimates for Qualcomm
(NASDAQ: QCOM - news), investors wasted little time dumping shares of the
cell-phone chipmaker in the past few days.
But while some fund managers remain sanguine about the stock and aren't cutting their losses so quickly, others are paring
their positions.
Qualcomm shares have steadily declined since the beginning of the year, which has seen many fund managers paring their
positions over the past few months. And in response to Wednesday's and Thursday's analyst earnings revisions, some
managers are paring even further, and others are re-evaluating their outlook for the company.
``The news lately has justifiably impacted the stock price,'' says Mike Eggly, senior analyst at the $2.1 billion Northern
Technology Fund (NASDAQ: NTCHX - news), whose portfolio includes Qualcomm. ``Considering Korea is 20% to
25% of the CDMA (code division multiple access) market strikes me as significant,'' he says.
``China has not played out to Qualcomm's benefit as strongly as we would've liked. We recently met with China Unicom
and they verified plans to use CDMA for 3G (third generation) systems, but not for the second-generation systems that
would've provided revenue in 2001. [The recent news] has impacted the percentage that we hold of Qualcomm,'' Eggly
adds.
But Jeff Van Harte, manager of the $288 million Transamerica Premier Equity Fund (NASDAQ: TEQUX - news), says
the past couple days' news hasn't altered his opinion on Qualcomm.
``I think it's noise,'' he says. ``In Korea, China and the rest of world, demand for wireless devices and wireless
applications is not going to go away. We're right at the inflection point of wireless being right about to take off. There may
be some short term negative impact, but to me it's just noise.''
Van Harte says he bought the stock in October as a long-term investment, and believes the company's long-term
prospects outweigh current concerns. He says Qualcomm's business model is only getting better, its capital intensity has
decreased and its free cash flow is increasing. ``It's a tech stock that has real earnings and cash flow. ''We've bought lately,
and bought a bit today,`` he says.
Qualcomm's shares fell another $9.06 to $61.44 in Thursday's trading, after shedding $10.88 to $70.50 on Wednesday,
which only adds insult to Qualcomm's already festering injury. The stock is down more than 60% for the year, making it
the S&P 500's seventh-worst performer.
On Wednesday, analyst Wojtek Uzdelewicz of Bear, Stearns cut his earnings estimates for Qualcomm by $0.03 or $0.04
per share to $1.08 per share for 2000 (year ending September), and to $1.30 per share from $1.40 for 2001, citing
concern about slowing sales in South Korea - Qualcomm's biggest market. Uzdelewicz also cited concern about sales in
China and Qualcomm's Globalstar (NASDAQ: GSTRF - news) satellite-phone venture.
Echoing Uzdelewicz's concerns, Chase H&Q analyst Ed Snyder cut his estimates on Qualcomm Thursday and initiated a
12-month price target of $50. Snyder cut his earnings estimates from $1.11 per share to $1.07 for 2000 and from $1.49
pr share to $1.27 for 2001, also citing the Korean sales slowdown, the deployment of CDMA in China and the Globalstar
investment.
In his Thursday report, Snyder said that cdmaOne handset sales are likely to fall 10% - 15% in 2002, due in large part to
the Korean government's recent ban on handset subsidies. Last year, about 45% of Qualcomm's cdmaOne handset
subscribers were in Korea. Snyder said Qualcomm might warn of lower-than-expected earnings this year if South Korea
doesn't reverse the ban on handset discounts.
While it's not new, the outlook for deployment of the CDMA standard in China is another concern both analysts
highlighted as a factor influencing their estimate revisions. Snyder said if CDMA is ever deployed in China, revenue now
appears to be at least three years away.
In February, Qualcomm inked an agreement with China Unicom that it said would lead to a CDMA network for 10 million
people this year. Now Unicom says it won't build that network, but will instead test Qualcomm's newer cell-phone
technology for a possible future network.
Wednesday, Qualcomm announced plans to develop a ''dual mode`` CDMA-GSM chip that would allow Qualcomm to
sell into GSM (global standard for mobile) - the standard on which China's networks and 55% of the world market
currently operate. However, Snyder says the cross licenses required to implement the dual mode system would likely
decrease margins on Qualcomm's chipsets and dilute the value of the company's royalty stream.
Finally, Uzdelewicz and Snyder cite Qualcomm's 6.4% stake in Globalstar, the only satellite phone company that has not
filed for bankruptcy, as a potential boon to Qualcomm's earnings performance.
As Globalstar is on course to run out of cash in four months without more funding, and phone production delays have
slowed the introduction of its service, the company appears to be on the road to bankruptcy. This doesn't bode well for
Qualcomm, which has approximately $1 billion in financial exposure to Globalstar.
Manager Tim Ghriskey of the $2.6 billion Dreyfus Fund (NASDAQ: DREVX - news) , which maintains a small position in
Qualcomm, also admits the company's recent issues are difficult to ignore.
''Every day we're evaluating our stake in every company and certainly when new information is coming out - and it has
been on this company recently - it makes you think about it and re-evaluate your position,`` he says.
With regard to Korea, Ghriskey says the problem is temporary, and will only impact Qualcomm's results in the near term.
He anticipates renewed strength from the company's Korean business once it handset surplus problems pass.
''This handset subsidy issue is a one-time event, the building of inventory is a one-time event, and the liquidation of this
inventory is a one-time event,`` he says. ''The Korean market, where [Qualcomm] has a high penetration level, is an
important market for them, and it's a handset, cell-phone friendly market - everybody's got one. In the near term, it'll be an
issue, but in the long term, I don't see it as an issue, once [the company work[s] through the inventory issues.``
However, both Eggly and Ghriskey cite Qualcomm's China and Globalstar issues as larger concerns. Ghriskey, whose
fund was buying Qualcomm shares in February, but sold in April and May, says while uncertainty regarding China's
adoption of CDMA has been on his radar screen for several months, it will likely continue to weigh on the stock until
positive news comes out.
Eggly shares a similar outlook. ''I think the outlook is mixed until we get more visibility on the next leg of growth, which is
the adoption of 3G wireless systems. That will be more of a driver of the stock in 2001 than it will be this year,`` Eggly
says. ''This year will be driven by sales of existing systems. If Korea and Globalstar are weak, it does not bode well for its
outlook unless we have another external event to look for.``
Long-term, Eggly says he still believes in the CDMA technology and Qualcomm's position in the CDMA market, but says
it appears his estimates were too aggressive for the near term.
Transamerica's Van Harte does admit Qualcomm's investment in Globalstar could develop into a problem, but regards it a
short-term negative.
As for Snyder's $50 price target, Van Harte says it probably won't go that low, but might dip to $55.
Bottom Line:
Qualcomm has a number of short-term problems to work through which rightly concerns many fund managers. But the
company's CDMA standard, and the potential for growth for its 3G systems may present a better long-term opportunity. |
