Why Qualcomm Is Bucking the Bear
The cellphone chipmaker's wireless-technology standard is gaining ground in China. Will the world be next?
businessweek.com
It has been a sweet holiday season for Qualcomm (QCOM ). While other telecom shares have been going down the drain, swamped by slower tech-sector growth, the San Diego (Calif.) wireless-technology concern has seen its shares jump 47% over the past few weeks. From about $60 at the beginning of November, it climbed to $83.43 on Dec. 19. The stock had actually breached $100 on Dec. 8 but slipped on news this week of Qualcomm's loss of a patent dispute with a Korean research institute and lower-than-expected net subscriber additions in South Korea.
Most analysts believe Qualcomm's long-term future is bright. The company makes chipsets for cell phones as well as software to operate wireless networks. But Qualcomm's trump card is a slew of patents on a wireless standard called CDMA (code divison multiple access). The patents are looking stronger and stronger as more companies and governments -- most notably, China -- have moved to adopt Qualcomm's standard for their next-generation wireless, high-speed data networks. (See BW Online, 12/13/00, "AT&T: A Resurgent Wireless Giant?")
COMMANDING POSITION? These victories have rekindled speculation that Qualcomm could become the Microsoft of the wireless field, collecting royalties for every handset minted and every subscriber signed up on a CDMA-based system. "We are now bullish on the fact that CDMA has done all we said it will do," says Qualcomm's President and COO Rich Sulpizio.
That sounds like a return to the good old days, when Qualcomm was the king of the Nasdaq bull in 1999. At the beginning of that year, the company's shares traded at $6.53. But Qualcomm's technology seemed to be making headway in important areas like China, which is expected to surpass the U.S. as the world's largest wireless market in 2002. By December, 1999, Qualcomm stock hit a high of $185. The company, which had attracted little interest over its 15-year history, was suddenly the toast of Wall Street.
Just then, things started to go wrong. The Chinese government made noises about retracting its earlier decision to open up the country's wireless monopoly to a foreigner. In June, 2000, Qualcomm reduced its estimates for the number of chipset orders in South Korea as wireless subscriptions there began to slip. The company's stock fell to $51.50 and underperformed other telecom shares throughout the summer, says Salomon Smith Barney analyst T.C. Robillard.
But in the fall, Qualcomm's luck turned once again. AT&T Wireless, one of the top three U.S. wireless-services providers, announced its plans to use Qualcomm's CDMA standard. Analysts hailed it as an indication of the technology's increased acceptance.
SEALING DEALS. Meanwhile, things have started looking up in China. In October, Chinese mobile-phone manufacturer ZTE Corp. announced that it would produce handsets using Qualcomm's technology. Later that month, Qualcomm Chairman and CEO Irwin Jacobs met with Chinese Premier Zhu Ronji, sparking anticipation that another major deal was afoot (see BW Online, 12/20/00, "Qualcomm's Irwin Jacobs: Closer to a Cellular Standard for China").
Sure enough, on Dec. 4, Beijing signed off on Qualcomm's agreement with China Unicom, the country's second-largest wireless-services provider. China's Information Industry Ministry, responsible for formulating the country's information technology policies, also signed a memorandum of understanding with Qualcomm. This supported a prior agreement between China Unicom and Qualcomm for a nationwide CDMA network.
While the timeline for CDMA in China is still fuzzy, China Unicom is expected to issue a purchase order for Qualcomm's network-management technology in the first quarter of next year, Sulpizio says. If all goes well, he believes commercial-equipment technology that Qualcomm licenses could be up and running by the summer of 2001. Qualcomm has already struck 12 research and development agreements with Chinese manufacturers and is now training their employees and selling them its semiconductors, the exec adds.
LONG-TERM PAYOFF. This progress has been the driving force behind the stock's runup. "The China issue has tended to be a very big driver behind Qualcomm stock, whether it's warranted or not," says A.G. Edwards telecom analyst David Heger. He points out that the company will not see any significant revenues from China in the near future as the agreement's terms (they have not been disclosed) are extremely favorable to the Chinese. But Qualcomm should stand to benefit in the long run through the sale of its products and CDMA handsets, he says.
Sulpizio estimates that 1 million Chinese will be using the company's technology next year, and 2002 will bring about a large expansion. "China Unicom is smaller [than competitor China Telecom] today, but with CDMA technology, they'll be a viable competitor," he says.
Though the deals appear to be done, investments in China often turn out to be not what they seem, as dozens of Western technology companies have found out, much to their chagrin. Politics dominate the country's business scene. Qualcomm "is still in a very tenuous situation," warns Dataquest senior analyst Bryan Prohm. "In China, the rug could still be pulled out of under them."
SPEED WINS? Furthermore, Qualcomm's CDMA technologies will be competing directly against China Telecom's GSM (global system for mobile communications) network in a shootout of two leading high-speed wireless standards. As the former state telecom monopoly, China Telecom might have the bureaucratic muscle to slow down or derail Qualcomm's CDMA gravy train. But many analysts believe that CDMA will vanquish GSM in China and other places because of the latter's lower data-transmission capacity.
And although Qualcomm might not see significant returns in the short term, the Chinese deals could put millions of customers on CDMA networks. That would mean a significant step toward locking in CDMA's future as a dominant global standard -- and a steady stream of easy money for Qualcomm. "China is a big market. It has the potential to establish CDMA as a world standard," says Barry Naughton, professor of Chinese economy at the University of California, San Diego's School of International Relations & Pacific Studies. And as long as Qualcomm can maintain the lead in the standards race, investors will likely stay jazzed about the stock.
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By Olga Kharif in New York
Edited by Alex Salkever |
