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

To: Wyätt Gwyön who wrote (111873)	1/30/2002 12:50:33 AM
From: ASB	Read Replies (1) \| Respond to of 152472

The operating margin for licensing is something around 90%. Also the margins for the chips will go up with volume. I'm not sure how Q will charge for data devices, which could cost alot more than cell phones. ASB

To: Wyätt Gwyön who wrote (111873)	1/30/2002 2:08:24 AM
From: pyslent	Read Replies (3) \| Respond to of 152472

"how does that give them $5 eps? i would like to see how this is done, because i don't see how it works out that way." My calculations on that are somewhat rough, back-o'-the-envelope, but I can arrive at it a number of ways. Easiest way is by noting that QCOM currently sports an eps of $1 by selling ~85 million CDMA devices -- that figure will probably grow 5X when unit sales increase to 500 million. But that's assuming you believe the current pro forma eps. Alternatively, think about the revenue stream. QCOM's licensing agreements (QTL) specify that they take a fixed percentage of the retail sale price of end user devices as a royalty. That portion of the business sports a lofty 90% margin. The common thinking is that the royalty rate is around 3% for chinese sell-through into china, and 5% for everyone else. So if you consider an average selling price of ~$200 * (5%) * 90% = ~$9 per phone to the bottom line. So for 500 phones, 4.5B to the bottom line. Assuming 1B fully diluted shares, that's ~4.5/sh. Again, these are ballpark figures; declining ASP will drag on these numbers a bit. But of course, maybe a good 35% of the phones will have a QCOM ASIC inside ($20 revenue ea, with %20 margins), so QCT will probably add a buck or so... So while revenue may only reach ~9B, operating margins should approach 50%. Of course, if mgmt continues to find ways to lose those profits, that's another thing altogether... Mucho, your arguments as to expected returns make perfect sense. I argued earlier (when QCOM was at $60, i believe) that the then stock price "priced in" an assumed $5 eps within a few years. If I didn't believe that those sort of earnings were forthcoming, I wouldn't be in this stock either. The way I see it, fair value is around $50/sh. My strategy has been to accummulate trading shares at ~40 and sell at around $60. You can always count on a lot of irrational volatility until QCOM shows the streets the money. But barring some disaster (for instance, documented health issues with cell phones), I think the that buying QCOM under $50 is the most risk-free investment out there and may eventually come with surprises to the upside. Just MHO. Incidentally, how does your DCF/valuation model price QCOM's NPV if it should grow from $1 eps to $5 eps by 2006 (I think that works out to a CAGR of 40% over 4 years)? alternatively, what return would one expect at the current stock price? it should come close to my "price target" of $125 by 2006...