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

To: slacker711 who wrote (49218)	11/28/2001 6:47:54 PM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 54805

Nokia stated yesterday that they believe that 10% of handsets sold in '03 will be 3G. They may be including EDGE so let's go back to their previous estimate of 6%. An ASP of $500 (the same price as the 7650 which will be released during the 2Q '02) on a market of 500 million handsets with a royalty rate of 5% gives W-CDMA royalties of $750 million let's see--CDMA has a little more than 90 million subs and ASPs well below $200....and you are assuming that in two years with industry-wide handset prices and ARPUs spiraling downward, a whopping 30 million people are going to suddenly pay an ASP of $500 for a handset in a brand new standard that could be full of bugs? i don't begin to buy it. nor do i believe QCOM will take a 5% royalty off that. i imagine something more like $200 ASP for half as many people, and a 3% royalty. Grand total of $2.225 Billion in earnings in '03. This would be about $2.75 in pre-tax earnings did you run these numbers a year ago? and a year before that? what did they tell you then? i am curious about that indeed. did they tell you that QCOM would have flat to down earnings for two years in a row? now they are supposed to go from a runrate of 84 cents to a clear-as-day outlook for more than triple that amount in the space of one year?

To: slacker711 who wrote (49218)	11/28/2001 7:08:39 PM
From: Wyätt Gwyön	Respond to of 54805

Could you go over your justification for a stock price of $10 for me one more time? as i mentioned in my previous message, you are assuming that a company which has had stagnant pro forma earnings the past two years (the quality of which earnings i will not comment on), is going to suddenly blue-sky it to more than three times that amount. i do not agree with your assumptions for the tripling of earnings, but i guess that is not really the issue here. if you really want to know my justification....well, let's be precise with our words here: it's not really a "justification"; it is, rather, the price at which i would consider the expected returns of the company to be consistent with long-term US equity returns of around 11%. and the price i said was around $12.50, as i recall. my perspective begins with their current 84 cents of pro forma runrate earnings, which i discounted by around a third or so to 58 cents (due to their frequent writeoffs, which causes me to not believe the 84 cents is a very reliable figure). from the 58 cents, they can pay a 50-cent dividend, equaling the 4% historical dividend on the S&P500 for the past 76 years. and they can plow the remaining 8 cents back into the business. if, in fact, they do manage to more than triple earnings to the $2.75 you mention, and applying a 30% tax rate thereto, one is left with around $1.93 in earnings. my assumption is that QCOM eventually reaches a steady-state of earnings, at which point earnings growth will probably track US or perhaps G7 GDP. so even if a three-fold windfall should occur as you suggest, i would assume the stock would enter a steady state soon thereafter. (in fact, i personally believe it is in a steady state already, with earnings ranging in the $1 plus/minus 20% range the past couple years). so at the point a steady state is surmised (let's take your $1.93 as that point), they can plow $0.27 back into the business, and deliver $1.66 as dividend. if the dividend is at the historical 4%, then the stock would be at $41.50. that is, of course, assuming they more than triple earnings, and that the earnings are real earnings and not pro forma earnings (seeing as they will deliver 86% of the earnings as cash to shareholders after taxes in this scenario) bogged down by various and sundry writeoffs. the above is not a "justification" for where the stock "should" be, nor is it a prediction of where it is going. it is, rather, an examination of where the stock would need to be for me to believe that i would achieve the long-term average return of 11%. if you think that's crazy, well, may i suggest reading some history of equity valuations.