After Blasting Telecom over the weekend, Barrons now Raves over QCOM
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Weekday Trader
Amid wireless wreck, Qualcomm is still a standout
While the sector stumbles, this company promises continued value and growth.
The primary reason: Qualcomm retains licensing rights for the top wireless
technology, CDMA.
By Eric C. Fleming
When the wireless wreck is over, one supplier will surely be still standing: Qualcomm (QCOM, news, msgs).
The San Diego, Calif. company licenses its code division multiple access (CDMA) wireless technology, known for its
exceptional call quality and long battery life, to some 115 million CDMA subscribers, according to the CDMA Development
Group. (Rival technologies TDMA -- time division multiple access -- and GSM -- Global System for Mobile communications
-- totaled 400 million subscribers, or about 70% of worldwide subscribers, according to the Universal Wireless
Communications Consortium.)
Right now, wireless looks like a vast wasteland: Providers have huge debt burdens, and subscriber growth is stalling, with no
clear path to profits.
And Qualcomm has suffered, too: Its share price has been more than halved from its 52-week high at 81.88 last February and
stands just 4% percent off its 52-week low of 34.59 reached earlier this month.
Recently Qualcomm reshuffled its management team amid concerns about its accounting. The Center for Financial Research
and Analysis questioned how Qualcomm had recorded revenue, such as accepting equity in exchange for receivables.
Qualcomm said that it was following accounting rules and the revenue issues only amounted to about $20 million of the $2.7
billion in fiscal 2001 sales.
William Keitel, Qualcomm’s newly appointed chief financial officer, tells Barron’s Online that Qualcomm changed its guidance
because it had taken about 16 cents out of earnings to account for its investment income separately. “It’s just logical (to
disclose investments),” says Keitel.
Increasing market share
The bulls are shrugging off these concerns, says Ken Smith, portfolio manager at the Munder Future Technology Fund
(MTFAX), which has a 3% position in Qualcomm in the $500 million fund.
“Over time (Qualcomm) is going to end up with increasing market share,” he says.
CDMA technology is in about 19% of cell phones worldwide, and that percentage is seen tripling in coming years, expects
Tom Carpenter, analyst at Hilliard Lyons, who rates the stock a Long-Term Buy. GSM is popular in Europe, and TDMA is
used by AT&T Wireless (AWE, news, msgs), among others.
Qualcomm is likely to get a bigger piece of the pie because no technology besides CDMA provides faster data rates. So, if
providers want the capacity to offer new services that CDMA can provide, then eventually royalties will flow to Qualcomm,
which owns most CDMA patents.
CDMA technology allows wireless providers to offer new services that others can’t, such as the camera phones used in Japan,
and music downloads to play MP3 files with the handset.
In China, the world’s most populous nation, China Unicom launched a CDMA network that has the capacity for 20 million
subscribers. It added 439,000 subscribers in January, with 1.3 million expected in the first quarter.
India, whose population of more than a billion includes just 4 million wireless subscribers, is another big opportunity for
Qualcomm. Reliance Communications, of which Qualcomm owns a stake, is rolling out a CDMA network in the subcontinent,
where a wireless network, which is cheaper to install, may supplant wireline.
Stateside, Verizon Wireless and Sprint PCS (PCS, news, msgs) are rolling out the much-ballyhooed 3G networks, which offer
faster wireless connections and multimedia features.
In the future, Wideband-CDMA (W-CDMA), also called Universal Mobile Telecommunications System (UMTS), should
garner more than 100 million users worldwide and $24 billion in sales by the year 2005, from 13.2 million subscribers and $4
billion in sales in 2003, according to the UMTS Forum.
Top opportunity: Europe
“The No. 1 opportunity for Qualcomm is in Europe, as providers migrate from GSM to WCDMA,” says Greg Teets, analyst
at A.G. Edwards, who rates the stock Strong Buy.
“The ultimate road map is to WCDMA,” adds Greg Mobley, analyst at Banc of America Capital Management.
New services, like color screens and fast download speeds, should drive a new consumer upgrade cycle, says James
Reynolds, analyst at Ragen MacKenzie, who rates the stock a Strong Buy.
That should give Qualcomm increased royalties from more handsets sold with its technology, and higher prices from new
chipsets it makes. (Qualcomm gets every penny of the royalties whenever CDMA is used on a phone.)
Worldwide sales of wireless phones are set to grow to 638 million by 2005 from 381 million in 2001, according to market
research firm IDC. Qualcomm forecasts 80 million to 90 million CMDA handsets will be sold this year.
At a recent 35.91, its shares trade at 39 times the Thomson Financial/First Call consensus of 93 cents a share for its fiscal
2002, ending Sept. 30, and at 30 times the $1.18 estimate for 2003. That’s a modest premium with its projected 2003 growth
rate of 25% and below its five-year historic median of 44 times forward earnings, according to Thomson Financial/Baseline.
The stock is also 323% higher than when Barron’s Online “discovered” Qualcomm in early 1999.
Lots of cash, no debt
Also, Qualcomm, with a market capitalization of $27.6 billion, has $2.14 billion in cash, or $3.14 a share, and no debt. That
cash hoard should more than cover loans to struggling carriers like Pegaso in Mexico or other potential bumps in the road.
One concern: Wireless providers will migrate to other technologies, such as GSM. Another worry: Providers’ cash flow will
ebb further, causing them to concentrate on shoring up their balance sheets rather than adding subscribers, and possibly leading
to consolidation.
Also, Qualcomm owns stakes in a number of shaky communications companies, such as Globalstar, which filed for Chapter
11. And it’s still up in the air who will eventually replace Chief Executive Irwin Jacobs, 68.
But wireless use will continue to grow, and CDMA has the most advanced technology of all the competing formats.
That’s why Qualcomm is likely to remain a standout while others stumble.
Barron’s Online Senior Writer Evelyn Ellison Twitchell contributed to this story. Comments? E-mail us at
online.editors@barrons.com. |
