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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: jmac who wrote (75737)	7/7/2000 6:50:33 PM
From: A.L. Reagan	Read Replies (3) \| Respond to of 152472

Speaking of the old times, still remember back in '97 CNBC's Joe Kernan cackling over a headline (think it was 9/30/97 results) that stated "QUALCOMM QUASHED!" That was one of the many 20% downlegs from the then-50's back to below even the famous "natural home." CNBC had a merry hoot at the time. Of course that was 8:1 shares ago. There's nothing that can be done about what one paid for a stock. It is a total irrelevancy, except maybe for taxes. All that matters is today's price. Some got caught up in the hype and paid too much. Others, this writer included, got caught up in the hype, ignored clear sell signals, and became quickly, and perhaps permanently, ex-Quillionnaires. All that matters is this. If you had no QCOM in your portfolio, would you buy today at $56? If yes, hold. If no, sell. In today's world, some 60% of the new business is GSM, 20% CDMA, 15% TDMA, and the balance iDen, etc. Of that 20%, between royalties and chips, QCOM gets a royalty on 100% of sales, and sells around 80% of the ASIC's (giving LSI, etc. the benefit of some doubt). So rough and tuff, QCOM has has around 90% of the business, and very conservatively a 12-month forward after-tax eps of $1.20, of which $.80-$.90 is arguably in the mainline CDMA business. (QWS had an exceptionally robust last quarter and QCT a poor quarter, so I'm trying to use a ballpark historical average mix.) Let's say 90% of the 3G world goes to WCDMA, with 10% EDGE, iDen, etc. So assume, worst case, 0% 3XRTT. But with that transition, there will be at least 2x (very conservative)the quantity of wireless devices on the globe as now. And to play with another conservative scenario, let's say for the sake of conservative argumentation that the aggregate royalty rate dips to 2.5%, and that Q's share of the global ASIC pie is only 15% (which I would consider a fairly dismal showing). A further simplifying assumption is that both device ASP's and ASIC margins overall remain the same. One can argue equally well either side of the ASP and margin issues. QCT's margins have hopped around - but it looks like 35-36% is a good base line with 12-month forward pre-tax in QCT of around $500 million - sales around $1.4 billion including 1XRTT. If we assume 5% royalties and around $680MM current annualized gross royalties, this implies $34 billion annual worldwide sales of royalty-bearing product. The total current ww market, assuming current CDMA = 20% is extrapolated as $170 billion, and the future 3G market at the conservative 2x today would be $306 billion ($170 x 2 x 90% WCDMA/CDMA combined share). What "core" eps might be extracted from the foregoing? The royalty contribution is easy using the above assumptions: $306 billion x 2.5% x 90% margin = $6.88 billion For ASIC's, extrapolated the future 3G market as $1.4 billion, divided by 80% market share within CDMA, divided by 20% global CDMA market share now, times 90% 3G-CDMA market share x 2 (market growth) = $15.75 billion x 15% share for Q = $2.36 billion sales x 30% margin (assumes we have to pay 5% royalty to the GSM cabal) = $709 million pre-tax. So, in summary, looking ahead to say 2004/5: QTL pre-tax $6.88 billion QCT pre-tax .71 billion QWS* pre-tax .28 billion Corp expense (.04)billion Net pre-tax 7.83 billion 39% tax rate (3.05) billion Net 4.78 billion eps+ $5.98 * highly conservative growth assumptions + assuming 80MM shares outstanding (today's fully diluted) So, ruff and tough $6.00 ps eps - assume a conservative 30x P/E in 2004/5 = $180 share price - or a triple from today in around 4 years. This to me is a fairly pessimistic scenario - not only does it mostly assume the worst of the worse in the core wireless telephony business, but it totally ignores a bunch of huge potential upsides. So, I am happy to add to a position today that looks like a lead pipe cinch as a triple in 4-5 years. And if anybody bothers to pro-forma the calcs by assuming CDMA2000 = 40% of 3G, the 5% royalty rate holds, and QCOM keeps 80% of the CDMA 2000 ASIC business and 20% of the DS ASIC's, you will approximate the Walter Piechuck $20 billion hallucinatory analysis of late last year. But you will also be astounded at the size of the numbers and very quickly have an appreciation for why the rest of the world has been hell-bent to knock the Q down a few notches.