From Business Week
Why Qualcomm Looks Worse Than It Is
Its shares are near the 52-week low, but new technology and a larger global presence next year could make it a long-term buy
Last year wasn't kind to Qualcomm (QCOM ) -- and at first glance, 2002 doesn't appear to hold out much hope, either. The wireless-network builder's prospects dimmed considerably in mid-2001, as network operators quietly pushed back build-out plans in the face of the economic slowdown. Then, on Jan. 24, the company sharply cut its earnings outlook for 2002, which further depressed shares. As of Feb. 6, the stock is trading at around $40 a share, just a notch above its 52-week low of $38.30 and half the value it had a year ago.
For long-term investors, however, the situation could spell a buying opportunity. January's bad news overshadowed a bright spot in Qualcomm's 2002 outlook: It posted a 6% year-over-year rise in sales in its first fiscal quarter. Plus, Qualcomm's lowered expectations are mostly the result of an accounting change in how it reports earnings rather than an indication of operational problems, says Jim Reynolds, an analyst with Wells Fargo Securities. Designed to make the company's revenues more transparent, the change shaves up to 16 cents a share from Qualcomm's 2002 pro forma earnings.
Truth is, operations are actually ramping up, and that promises solid growth in the second half of 2002. Small wonder that 22 out of 23 analysts covering Qualcomm now rate the stock a buy or a strong buy.
BIG-LEAGUE PLAYER. Yes, the company projects pro forma, second-quarter earnings per share of just 19 cents to 21 cents, off a full nickel from analysts' estimates. It also lowered its outlook for the year, to around 90 cents to 97 cents in EPS, vs. the $1.10 to $1.20 estimate given three months ago. But Qualcomm, which makes the bulk of its money on royalties and chipsets for cell phones, will probably get a revenue boost as U.S. and Asian operators shift to new networks powered by the company's wireless technology later this year, many analysts say.
Qualcomm is already a big-league global player. About 117 million people worldwide use cell phones based on its patents, up from 80.4 million at the end of 2000, according to industry consortium CDMA Development Group. And because Qualcomm is the first company to come out with a chipset that works with new advanced wireless networks, Qualcomm's global market share in chipsets should rise from about 70% to 80% in 2002, predicts Scott Searle, analysts at SG Cowen Securities.
On Jan. 28, the largest U.S. operator, Verizon Wireless, launched a network in several regions that allows for "always-on" wireless Internet access with download speeds of up to 144 kilobits per second -- a tenfold improvement over today's typical 14 kilobits per second. It's based on Qualcomm technology. Plus, Sprint PCS (PCS ) is due to launch a nationwide advanced wireless network that's Qualcomm-based this summer. With deals like these, analysts expect Qualcomm to have no trouble continuing its double-digit growth in royalty fees from network-infrastructure and cell-phone makers, says Searle.
Qualcomm should sell 80 million to 90 million chipsets in 2002, vs. 75 million in 2001. That's less than expected previously, due to the impact of the economic downturn on cell-phone sales. But it's still a gain.
KEEPING TABS. Meanwhile, an expected Federal Communications Commission decision later this year should aid Qualcomm's growth. The FCC is likely to stipulate that all new cell phones carry technology allowing emergency workers and 911 operators to pinpoint the exact geographic location of a wireless phone user at any time. Qualcomm licenses this technology and could benefit.
Most U.S. operators are expected to start offering the location technology in late 2002 or early 2003, and some Sprint PCS phones sold since October already feature it. In Japan and Korea, operators use this technology for nifty services, such as helping parents track down their children or giving directions to nearby restaurants. "It'll be the icing on [Qualcomm's] cake," says Allen Nogee, an analyst with Cahners In-Stat.
To add to Qualcomm's healthy outlook, high demand for cell phones in India and developing countries in Eastern Europe is likely to boost the company's earnings in coming quarters. By yearend, these countries could contribute as much as 10% of the company's revenues, up from nearly zero today, estimates Searle.
TEMPORARY GLUT? On Jan. 10, Qualcomm invested $200 million for a minority stake in Indian telecom Reliance Communications, which should help introduce Qualcomm's new technology on the subcontinent. And China's second-largest telecom, China Unicom, recently launched a network based on Qualcomm's technology. Plus, Qualcomm entered into license agreements with 11 Chinese manufacturers on Jan. 23.
Not everyone is convinced that cell-phone use will pick up in the U.S. or skyrocket in Asia anytime soon. That's why CIBC World Markets lowered its Qualcomm rating to hold from strong buy on Jan. 25. Also, a temporary glut may have developed in some advanced wireless chipsets even though Qualcomm has yet to see a slowdown in orders, says Thornley.
Still, if Sprint PCS's new network and its new wireless data services take off this summer, Qualcomm's stock could get a lift, believes Reynolds, who has a 12-month price target of $61 on its shares. "The stock could do better than that," he adds. This might one sluggish telecom to keep an eye on. |
