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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Eric L who wrote (31515)	9/12/2000 8:47:11 PM
From: Bretsky	Read Replies (2) \| Respond to of 54805

Some interesting comments from the Bull Market Wireless Investor 5. QUALCOMM EXPLAINED by Paul Tracy We've received a lot of questions about QUALCOMM (QCOM, $61) recently and we want to help clear things up. The stock has dropped 70% from its 52-week high of $200, leaving many investors a bit queasy. Yet we still feel confident about Qualcomm's long-term prospects and are going to ride this volatile stock for a bit longer. What exactly does Qualcomm do? The company designs and manufactures integrated circuits, intellectual property and hardware for the wireless communications market. Essentially, they make the technology that makes wireless communication possible. Qualcomm was one of the first to develop what is called code division multiple access (CDMA) technology, which is quickly becoming the standard platform used in most third-generation wireless systems. CDMA is so powerful because it offers superior capacity and quality, especially when compared to rival technology. As wireless voice and data converge through the use of portable devices, CDMA is going to emerge as the standard platform for mobile devices and Qualcomm is going to profit from this in a big way. Qualcomm holds more than 1,300 patents on wireless technology in North America alone, and they're looking for more. The company will spend roughly $300 million in R&D this year, and the vast majority of this will be spent on CDMA-based research. Right now they have over 1,000 engineers working on the development of wireless CDMA semiconductors and software, which represents a far greater emphasis on R&D than most of their competition. As they work to broaden their product line, Qualcomm hopes to increase their market share of the content within each cellphone. Right now the company is responsible for only 25% of the semiconductor material within each handset, but this percentage is expected to increase over the next several years. Another reason we like Qualcomm is because wireless data is set to explode. The number of cellphones in use is already at least 50% greater than the number of PC's, but only a small portion of these phones are connected to the Internet. This is going to change. Most phones that are now being sold have Internet capabilities in them, and the number of Internet-enabled phones is eventually expected to eclipse the number of Internet-enabled PC's! This is truly a huge opportunity. We see big upside potential here if China decides to adopt CDMA technology. Although most wireless carriers in the country use the European GSM standard, it looks like this might change. China Unicom announced on Friday that its parent firm is likely to make an investment in CDMA technology. Despite flip-flopping on the issue for several months, we're hopeful that the company will eventually decide to adopt this standard. If they don't, then we probably won't see a big downside move in Qualcomm's stock (because most investors are still skeptical about China's adoption of CDMA anyway), but if they do decide to move into CDMA, then Qualcomm will be one of the primary beneficiaries. The market has punished Qualcomm's stock this year, and perhaps investors needed a breather after watching the stock soar from $7 to $176 last year. But profit-taking aside, there are other reasons why Qualcomm is down so much this year. For one, earnings prospects in international markets have been dampened by poor sales in Korea. For years the government there has subsidized the sale of wireless communications devices, making them affordable to millions of Korean citizens. But they recently eliminated the subsidy, causing a sharp decline in handset sales in the region. On the surface this may not seem to be important for California-based Qualcomm, but when you look deeply at the numbers you'll see that Korea represents about 22% of the company's total revenues. Another reason Qualcomm has languished is because of uncertainty surrounding Globalstar (GSTRF, $10), a satellite phone service business that brings in about 10-15% of Qualcomm's total sales. This is certainly a risky business as evidenced by the bankruptcy of competitor Iridium, which was once a high-flying tech company. The CEO of the Globalstar is a tough cookie and their whole investment may be in jeopardy. In addition, Qualcomm relies heavily upon its manufacturing partners. This can add quite a bit of risk because there are many factors, such as capacity and manufacturing cost structure, that are out of the company's hands. Many investors don't realize that Qualcomm has no factories. You heard us right, the company does not manufacture any of its own products. While this gives the company greater leeway to focus all of their efforts on R&D, it also leaves a big portion of their operating margins subject to factors out of their control. We feel that all of the bad news is already priced into the stock, and those of you who are saying, "I just wish I could have jumped on this stock last year," are getting a second chance with the stock trading below $60. However, keep in mind that this is a highly volatile company primarily involved in research and development. As such, any unexpected technological shift, such as technological advances in a competing wireless platform such as GSM, could cause this stock to move even lower. Qualcomm will benefit from the explosion of wireless data services, and we want to make you aware of the big risks involved in this infant industry so that you can make your own decisions. We added this stock to our portfolio at $6 in February of 1998, and are looking at a 12-month price target of $90. = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =