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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Hobie1Kenobe who wrote (110677)	1/10/2002 5:31:57 PM
From: Ruffian	Read Replies (1) \| Respond to of 152472

That Qualcomm Mystique, Part 1 By Tero Kuittinen Special to TheStreet.com I tried to write this column without referring to nationalism or investor emotions. It can't be done. Qualcomm (NasdaqNM:QCOM - news) is a highly emotional topic among tech stocks -- much as Verizon (NYSE:VZ - news) and Sprint (NYSE:FON - news) are, to a lesser degree. ... ( This article continues for RealCommentary subscribers...) The reason to buy Qualcomm now is that U.S. investors have finally realized how weak second-generation CDMA networks are commercially. This is the moment of disillusionment. Qualcomm's genuine strengths -- a good chipset unit and a great licensing fee outlook -- are being ignored. The company itself created its recent share-price crash. By relentlessly overhyping CDMA, it invited a vicious backlash. Overpromising and underdelivering are organic to Qualcomm. However, just because Qualcomm is a lot like P.T. Barnum doesn't mean it can't also be a bit like Thomas Edison. Qualcomm is simultaneously a tacky carnival barker and an ingenious technology company. Despite Qualcomm's chipset and licensing advantages, the current CDMA networks never delivered the superior performance that was once promised. Verizon, Japan's KDDI Corp. and CDMA operators in Latin America are falling below projected growth performance. Almost no one acknowledges this mixture of good and bad. In the land of Qualcomm, there are only absolute worshippers or vicious detractors. Let's break this cycle and examine both sides. I'll start with the juicy stuff and do another column Friday about my grudging admiration. Hometown Hero The common factor among Qualcomm, Verizon and Sprint is CDMA. In the early '90s, the rise of global systems for mobile communications, or GSM, to the global mobile-telephony standard created a backlash in the U.S. Qualcomm developed an alternative second-generation standard, CDMA, and became an icon. Verizon and Sprint championed this U.S. mobile standard that was destined for greatness. Right from the start, the story got portrayed as a moral fable: the U.S. can-do attitude vs. a European standard developed by a committee and imposed by bureaucrats. (The usual demons were European governments pressuring developing countries, Scandinavian vendors bribing Latin American operators, etc.) CDMA would be superior in every way -- and its glamorous flagship carriers, Verizon and Sprint, would become global showcases for the brilliance of California tech savvy. Qualcomm has mined this cliched but irresistible narrative quite successfully in recent years. Rarely has the technology industry seen such a compelling morality tale. So Qualcomm watchers split cleanly into two camps: giddy U.S. observers and icily dismissive European snipers. Qualcomm cast a spell on certain American IT gurus. Any and every absurd claim it made was enthusiastically embraced. One million CDMA satellite phones by the end of 2001? Way cool! CDMA overlays on TDMA networks and Nextel. The deals are almost signed! Data-transfer speeds of more than 100 kilobits per second for 1xRTT (the new upgrade for CDMA networks) in 2001 for Verizon? It's a done deal! As these claims unraveled in the past 24 months or so, the reaction has ranged from denial to panic. The latest blow -- Verizon's dismal subscriber-addition performance -- hurts so much because it undermines the very foundations of the CDMA story. Recently, U.S. investors have slowly digested that CDMA operators in Israel, Mexico, Japan, Hong Kong, Australia and other markets have started to disappoint. But the fact that U.S. consumers don't see CDMA phones any more appealing than Nextel's iDEN models or AT&T's and Cingular's TDMA handsets cuts to the quick. Qualcomm stock is so volatile because the bar was raised so high. The claims made by CDMA fans were so extravagant that they were bound to fail -- and investors' reactions have often been violent. Second-generation CDMA won't ever be much of a player outside the U.S. and Korea. It now has 100 million subs vs. GSM's 600 million. This gap isn't going to narrow; it will only grow. Second-generation CDMA is a pretty nifty niche standard, but it will never seriously challenge GSM. The 100 million subscriptions that CDMA has achieved in recent years is a remarkable victory for Qualcomm. But it can't match the dream of a CDMA Camelot that the hypesters created, so now Wall Street is mulling that gap between real achievements and impossible goals. A year ago, Verizon claimed it would launch 1xRTT models in 2001 at data speeds of more than 100 kbps. Recently, the operator admitted that the launch is delayed to 2002 and that top speeds will be 40 to 60 kbps. Remarkably, there's been almost no media critique of this. CDMA showed red-hot growth rates two years ago, as various operators jump-started their programs with lavish promotional incentives, but then CDMA just couldn't compete with entrenched operators outside the U.S. and Korea. The claim that second-generation CDMA was destined for global dominance slowly fell apart. The Moment of Truth The final blow is Verizon's slow fizzle. To put the recent performance in context, Verizon gained 715,000 new subscribers during the fourth quarter of 2001. That's 2.5% growth during the hot Christmas quarter. The U.S. digital phone market penetration is at about 40% -- right at the sweet spot, the point at which mobile markets supposedly display the hottest growth. During a similar spot in the phone market growth in Italy and Portugal, dominant operators clocked in 15% to 20% subscriber-addition growth quarterly. Here's the taboo topic of the moment: Verizon is arguably the weakest major mobile operator in the industry's history. No other big operator has failed the growth test this badly in its domestic market. If Hong Kong or Israel didn't prove that CDMA isn't what it's claimed to be, Verizon is the nail in the hype coffin. From 2001 to 2003, GSM will emerge as the fastest-growing digital standard in America. Any Sprint subscriber in Chicago or Verizon customer in Los Angeles knows from bitter experience just what that CDMA edge over rival standards amounts to in real life. So let's admit once and for all that CDMA never achieved its goals. Sure, it had features that were technologically more advanced than anything GSM possessed. But that was countered by the flaws: lack of text-messaging support and international roaming. These shortcomings were never really admitted by CDMA fans; they were brushed aside as insignificant. Nevertheless, these factors hamstrung CDMA in Southeast Asia during 2000 and 2001. What's sordid and sad about Qualcomm are the overblown claims about second-generation CDMA. But what's interesting and promising are the new 1xRTT upgrade for current CDMA networks and the upcoming licensing fees from third-generation mobile products. In my follow-up column Friday, I'll take a look at why Qualcomm will rebound once again -- and why it may be the most compelling mobile-buying opportunity at the moment. It isn't because the company is perfect or that current CDMA operators have stellar growth prospects. I acknowledge this probably isn't the case. However, Qualcomm's technological strength and bright licensing prospects will probably ultimately outweigh the disappointments.