Hey Buddy.
Here is a write up from last night's Bull Market Report on QCOM that might interest you...
QUALCOMM
We've received a lot of questions about QUALCOMM (QCOM, $100, up 10)
recently, and we want to help clear things up. The stock has dropped
precipitously from its 52-week high of $200, leaving many investors a bit
queasy. However, its recent relative strength has been encouraging. After
bottoming around the $52-$60 level from June to September, it has
recovered nicely despite difficult market conditions. We still feel
confident about Qualcomm's long-term prospects, and are going to ride this
volatile stock for the long haul.
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 (3G)
wireless systems. CDMA is so powerful because it offers capacity and
quality that is superior to rival technology. As wireless voice and data
converge through the use of portable devices, CDMA will emerge as the
standard platform for mobile devices, and Qualcomm will 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 cell phone.
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 that wireless data is set to explode.
The number of cell phones 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, 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 are also enthusiastic because China - which is an incredibly large
market - intends to use CDMA technology. On December 4th, Qualcomm signed
a memorandum of understanding with China's Ministry of Information
Industry. This ensures that the CDMA standard will be deployed in a
network to be built by state-backed carrier China Unicom. We see the
potential for huge royalties here.
Heretofore, most wireless carriers in the country have used the European
GSM standard. Can we be absolutely certain that CDMA will supplant GSM in
China? No. A degree of skepticism is necessary when one considers
China's professed intentions about anything. But we think it will happen
(after all, it is the best technology), and Qualcomm shareholders we will
have plenty to celebrate about if it does.
Remember that two years ago Qualcomm sold for around $7? So it is no
wonder that the stock has been vulnerable to profit-taking during the
Nasdaq's retreat. But profit-taking aside, there are other reasons why
Qualcomm has tumbled from its highs. 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 Korea 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 due to uncertainty surrounding
Globalstar (GSTRF, $1.50, unch.), a satellite phone service business that
contributes 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. Globalstar’s CEO is a tough cookie,
but their whole investment may be in jeopardy here.
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 its efforts on
R&D, it also leaves a big portion of Qualcomm’s operating margins subject
to factors that are out of their control.
You can therefore understand some of the risks in this stock. It is
important to keep in mind that this is a highly volatile company that is
primarily involved in research and development. Yes, you have the
opportunity to buy this stock at a substantial discount from its highs.
However, 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, but 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 given the stock’s recent
strength, we hereby up our 12-month price target from $90 to $120. |
