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Nothing new but good news none the less.
IN THIS ISSUE:
1. THE BULL MARKET REPORT WEEKLY SUBSCRIBER HOLIDAY SPECIAL
2. FCC TO BRING MORE WIRELESS SPECTRUM ONLINE
3. MOTOROLA JOINS THE WARNING PARADE
4. PROFIT WARNING TAKES A BITE OUT OF APPLE
5. QUALCOMM UPDATE
6. OIL STOCKS REBOUND AS IRAQ SHUTS OFF SPIGOTS
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1. THE BULL MARKET REPORT WEEKLY SUBSCRIBER HOLIDAY SPECIAL
We at THE BULL MARKET REPORT are excited to offer all of our weekly
subscribers the opportunity to receive the same information, insight, and
opinion 5 days a week! You can receive The Bull Market Report 5 days a
week, as well as all of our news flashes AND access to The Bull Market
Report Investment Portfolios, all for only $125 a year! And now, as a
special bonus, if you order before 12/31/2000, you will receive an extra
month FREE! That's 13 months of The Bull Market Report, delivered daily
for only $125!
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here </a>
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>From Friday’s newsletter:
2. FCC TO BRING MORE WIRELESS SPECTRUM ONLINE
After much legal wrangling and delay, the Federal Communications
Commission (FCC) will auction valuable wireless-spectrum licenses starting
on December 12th, 2000. The delays came about due to financial troubles
at Nextwave Telecom. The company won a number of key spectrum licenses in
the 1996 FCC auctions. However, their financial troubles brought about
the need for the FCC to reclaim those licenses. These include a number of
highly sought-after licenses, and although Nextwave tried to retain them,
the company eventually exhausted all of its legal avenues and was forced
to give them up.
Companies that are expected to participate in next week’s auction include
Verizon Wireless, Cingular Wireless, AT&T Wireless (AWE, $20, up 1),
Sprint PCS (PCS, $26, up 1), Nextel Communications (NXTL, $32, up 1), and
VoiceStream Wireless (VSTR, $114, unch.), among others. The high costs of
securing a spectrum license have brought about new alliances and
consolidations within the world’s top wireless companies. Here is a quick
breakdown of the participating entities’ business relationships:
Verizon Wireless -- Joint venture between Verizon (VZ, $56, down 2) and
Vodafone (VOD, $39, up 1).
Cingular Wireless -- Partnership between SBC Communications (SBC, $52,
down 3) and BellSouth (BLS, $44, down 1).
VoiceStream Wireless -- In the process of being acquired by German
telecommunications giant Deutsche Telekom (DT, $32, down 1).
AT&T Wireless -- NTT DoCoMo recently purchased a 16% interest in the
company for roughly $10 billion
What we are seeing here is some of the world’s most powerful wireless
companies teaming up in an effort to capture a larger chunk of the
lucrative U.S. wireless market. As with most spectrum auctions, the main
concern here will be whether or not bidding wars will lead auction
participants to overpay for certain licenses. Recent developments suggest
that they won’t.
Industry sources believe that many companies overpaid to acquire European
spectrum licenses earlier this year. This has led to recent
repercussions, the most glaring being British Telecom’s (BTY, $97, up 5)
decision to withdraw from last month’s spectrum auction in Switzerland,
forcing its cancellation. Also, the recent spectrum auction in Poland
garnered such a lack of interest that it was cancelled and licenses were
awarded to the country’s top three wireless outfits (for a price,
naturally).
Although we don’t expect the bidding to go overboard, this U.S. auction
may be one of the largest ever held by the federal government. There are
two reasons for this:
First, the upcoming auction contains licenses that give access to many
prime metropolitan areas of the country. Several major wireless providers
are looking to bolster their presence in these areas. For example,
Chicago, Los Angeles, New York, Seattle, as well as a host of other major
U.S. cities have pieces of their wireless spectrum on the block.
Obtaining spectrum licenses in these areas will make whoever wins them a
more competitive player in today’s wireless arena.
Secondly, we would look at the fact that these licenses will help
companies evolve to next-generation services (two-way messaging, Internet
access, email capabilities, etc.) in the coming years. With close to 20%
of the world’s population now having a wireless handset, and with
increasingly complex voice and data offerings now being made available,
the need for more spectrum will continue to increase. More of us have
taken to using wireless communications, yet we all have experienced some
of the setbacks they bring.
Granted, wired phones will continue to be more reliable than wireless (for
the time being). For those of us that have had calls dropped in
mid-sentence or ones that failed to make a connection, this lack of
reliability continues to be a cause for aggravation. However, the
trade-off between wireless convenience and reliability will become less of
a problem as wireless technologies improve and spectrum increases. These
upcoming auctions will allow carriers more spectrum in which to route
calls, and will ultimately lead to better service.
How does this affect the individual investor? Recently, many wireless
providers have made alliances and license swaps in order to beef up their
service areas. We see this as a reassuring tone, as it makes it less
likely that a bidding war will not break out. If prices remain relatively
reasonable in next week’s auction, we think it will go a long way toward
jumpstarting wireless stocks, most of which are still hovering near their
52-week lows.
Projections are for this auction to raise about $18 billion. We will keep
a close eye on that number, as an extremely higher tally would raise
doubts about the viability of future next-generation expansion. Stay
tuned!
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>From Thursday:
3. MOTOROLA JOINS THE WARNING PARADE
Shares of Motorola (MOT, $18, unch.), the world’s #2 mobile phone maker,
traded at a fresh 52-week low today after the company cut its 4Q00 profit
estimates by more than 40%. Motorola now expects 4Q00 earnings of $0.15
per share on sales of $10 billion, substantially below its prior earnings
estimates of $0.27 per share on sales of $10.5 billion. Company officials
also alluded to a couple of major factors responsible for the decrease in
earnings.
Motorola cited a slowing semiconductor market and the failure to institute
cost-cutting measures into their wireless phone production as the two
leading contributors to the earnings shortfall. On the brighter side, the
company expects sales of its mobile phones to increase over 30% to roughly
550 million units in 2001.
COMMENTS: It is starting to seem like big technology companies are just
lining up to announce their shortfalls. With Gateway (GTW, $17, unch.),
Apple Computer (APPL, $14, unch.) and now Motorola all issuing warnings
this week, investors are beginning to question where our hi-tech economy
is headed. Recent inventory tightening has had a harsh effect on
suppliers like Motorola. These companies are feeling short-term effects
of the fluctuations of supply and demand. However, we feel this may set
up the opportunity for some very positive results in the upcoming quarters
as inventory levels stabilize.
Today’s news does not come as a surprise. Motorola has been struggling
all year, and recent semiconductor inventory concerns have been widely
publicized. We feel that the announcement actually has a silver lining
for wireless investors. As Motorola stated, the company is set to sell
30% more wireless handsets in 2001. Coupled with growth in both two-way
messaging devices and personal digital assistants (PDA’s), we expect the
wireless sector to show very healthy growth next year. Nokia’s (NOK, $51,
down 1) upbeat outlook (announced earlier this week) also helps to fuel
our optimism toward this sector.
Although the overall market may be weak, we feel that wireless stocks will
be some of the first to rebound once conditions improve. Wall Street just
can’t continue to ignore this explosive growth!
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>From Wednesday:
4. PROFIT WARNING TAKES A BITE OUT OF APPLE
Last night, Apple (AAPL, $14, down 3) cautioned investors that its fiscal
1Q01 revenues and earnings would come in well below Wall Street
expectations due to weak holiday sales. The troubled computer maker said
it expects revenues to hit $1 billion in the quarter, or $0.6 billion
below estimates, and it also expects to post a net loss of roughly $250
million versus expectations for a $10 million profit. If Apple does
indeed lose money, it would mark the firm’s first quarterly loss in
several years.
Last night’s negative announcement comes on the heels of another
high-profile warning in the PC sector. Last week the nation’s #4 PC
maker, Gateway (GTW, $17, down 2), also warned of weak holiday sales.
It’s also worth noting that Gateway went a step further than Apple by
mentioning the possibility of an industry pricing war in early 2001.
COMMENT: Both announcements have spelled disaster for the entire PC
sector, and it has been frustrating to watch. Although this is Apple’s
second straight profit warning, this one is far worse than the firm’s
preannouncement in September because that related more to company-specific
problems than to anything else. Last night’s announcement was different,
however, in that it reaffirms what Gateway warned about last week – that
we are in the midst of an industry-wide slowdown.
Our direct exposure to this sector isn’t all that great, as Dell Computer
is the only boxmaker we hold. We will continue to hold it in our
Long-Term Core Holdings Portfolio because we do not feel that a few slow
quarters will make or break the company. We are in this one for the long
haul.
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>From Tuesday:
5. QUALCOMM UPDATE
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. |
