From Todd Shaver's Bull Market Report:
QUALCOMM -- HIGH FLYER? LOW FLYER? WHERE FROM HERE?
By Peter Brownfeld
Qualcomm (QCOM, $63, up 6), which has been one of the highest-flying stocks, recently suffered major setbacks in the telecommunications market in Asia. On July 7th South Korea's wireless carriers, SK Telecom, Korea Telecom, and LG Telecom, announced that rather than using Qualcomm's
technology, they are planning to use a new generation of mobile-phone technology that will provide high-speed Internet access from European phone makers Nokia and Ericsson, along with Japan's NTT DoCoMo. Until now, Qualcomm had supplied the system used by Korea's 26 million mobile customers. With about 60 million users worldwide, Qualcomm technology accounts for roughly 20% of the world's mobile phone market.
Although South Korea is one of Qualcomm's biggest markets, the blow is not as harsh as it may seem. The competing standard is several years away from deployment. Additionally, the rival systems are based on Qualcomm's code division multiple access, or CDMA, thus the firm will still reap substantial royalties. It was this technology that caused Qualcomm's stock to soar last year.
South Korea's announcement was the latest in a series of Asian setbacks for Qualcomm. In May, China Unicom, Qualcomm's partner in Asia's largest potential market, said it would not adopt second generation CDMA, instead opting for third generation, or 3G technology. 3G is expected to be a more universal standard than earlier technologies.
A third item of bad news surfaced last week when the president of Ericsson prompted a stock sell-off. He spoke about governmental licensing fees, which could be as high as $100 billion to sell the services and $200 billion to build networks, which will raise the cost of mobile phones.
These charges will be passed onto the consumers and could curb demand. "It's obvious that growth in the cellular market runs the risk of being damped as a consequence of the high charges," he said.
Analysts expect a shift in the growth rate of this industry. "There has been an assumption that demand for new generations of cell phone and other telecommunications equipment was going to stay in this steep, uninterrupted growth curve," said the president of Northstar Group, Inc.,
a money manager that oversees $150 million. "Ericsson's announcement calls this into question."
Qualcomm had been one of the best performing tech stocks, increasing 27-fold in 1999, making it the strongest performer in the Standard & Poor's 500 index. This year, however, it has dropped more than 60%.
Despite these setbacks and the drop in the stock's price, Qualcomm's future is not as bleak as it may seem.
Qualcomm's technology will likely become the core for a new global standard that will enable mobile phones to more effectively process e-mail and surf the Web, receive CD-quality audio and video, as well as handle voice calls. Qualcomm is still pushing its 3G technology in competition
with companies like Nokia and Ericsson, and spokeswoman Christine Trimble expressed doubt that South Korean companies had shut the door on its technology: "We don't believe any official decisions have been made. Korea is a strong CDMA market."
Some analysts believe that the Korean move will not have a dramatic effect on the company's future. "This is the third time the Koreans have done this, and each time they introduce new programs to get around it," said Brian Modoff of Deutsche Bank. "The effects of this will probably last
only one quarter." Qualcomm is seeking to offset the weakening in South Korea by increasing the use of CDMA chip technology in other nations. Japan, which introduced the CDMA chip in April 1999 had 3.5 million users by December, and is still growing fast. Qualcomm does not anticipate the
South Korean problem to affect third quarter earnings, which are due to be announced on July 19.
Even when other companies' 3G technology is used, Qualcomm still benefits. Qualcomm has licensed its patents to more than a dozen firms developing 3G technologies, and the company collects royalties regardless of whether its patents are used for its preferred or rival systems. Companies with licenses include Samsung, Lucent, Ericsson, Nortel, Hyundai, Sony, Hitachi, and Philips. In the last fiscal quarter, 26% of Qualcomm's revenue came from licensing fees. Among Qualcomm's other sources of revenue are chipsets and system software, satellite-based systems, Eudora e-mail software, secure wireless phones for government clients, and digital-quality motion pictures provided directly to cinema theaters by electronic means.
3G technology is spreading rapidly through Asia, with more nations preparing to choose which version to adopt. Japan, South Korea, and Australia will be among the first to launch it, with Taiwan, Hong Kong, and Singapore to follow. All must choose CDMA or from among the different
3G technologies, and their choice will have significant implications for Qualcomm and its rivals.
In 2Q Qualcomm announced revenue of $728 million and income of $200 million, or 25 cents a share. In 1999 the company reported revenue of more than $3.9 billion and net income of $200 million. Earnings have risen each of the last four years and are expected to go up in 2000 as well.
Asia is the largest growth market for the Internet. Internet usage is predicted to have an annual growth rate of 40% between 1999 and 2003. By 2003 one-fourth of total Internet users will be in Asia.
The spread of mobile phones and the Internet across Asia shows that this is a dynamic industry with profits available for many companies. As one of the pioneers of mobile phone technology, and the holder of many licensing agreements, Qualcomm is sure to do very well in the future.
Some might call it a cash machine.
Peter Brownfeld
Brownfeld@Hotmail.com |
