SSB piece on Qualcomm.
[I am repeating the text of post # 32392 ...
with the header identifying the topic
without italics
with a few paragraph spaces.
Thank you for your continued support ...]
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QUALCOMM, Inc. (QCOM)
QCOM: Reliance Could be an Early Surprise, 2H (In-line, High Risk)
But More Risks Than Meet the Eye Mkt Cap: $29,591.7 mil.
February 13, 2003 SUMMARY
* An update on the risks to QCOM shares as relates to opps
TELECOMMUNICATIONS in India.
EQUIPMENT--WIRELES * Reliance's national CDMA WLL-M soft launch, which
S began the end of Dec 02 is aggressive & impressive. We
T.C. Robillard Jr. est the number of subs signed up by April 1, when
commercial service is planned, could surprise positively
at greater than 1 mn due to "low-hanging fruit" sales
Karen O. Nielsen strategy by Reliance.
* But, longer term concerns (i.e., 2H03) are: (1)
Reliance price advantages vis-a-vis cellular & fixed is
Kevin Doherty in question after 1/27/03 new tariff regime was
announced; (2) sales for Relaince could prove
challenging post the initial push to sign up employees
and friends/family of employees & (3) 3 yr upfront
payment is a real obstacle.
* We recommend using any near-term strength on fully
booked Mar qtr & potential sub pop come April from India
to reduce positions & wait for negative sentiment to
play out. We rate the sector Underweight.
FUNDAMENTALS
P/E (9/03E) 28.1x
P/E (9/04E) NA
TEV/EBITDA (9/03E) 47.1x
TEV/EBITDA (9/04E) NA
Book Value/Share (9/03E) $6.88
Price/Book Value 5.3x
Dividend/Yield (9/03E) $0.15/0.4%
Revenue (9/03E) $3,752.7 mil.
Proj. Long-Term EPS Growth 10%
ROE (9/03E) 77.5%
Long-Term Debt to Capital(a) 2.7%
QCOM is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (2/12/03) $36.56 Current Rating 2H
52-Week Range $43.80-$23.75 Prior Rating 2H
Shares Outstanding(a) 809.4 mil. Current Target Price $36.00
Convertible No Previous Target Price $36.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
9/02A Actual $0.23A $0.20A $0.24A $0.31A $0.98A
9/03E Current $0.42A $0.35E $0.28E $0.24E $1.30E
Previous $0.42A $0.35E $0.28E $0.24E $1.30E
9/04E Current NA NA NA NA NA
Previous NA NA NA NA NA
9/05E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 9/03E $1.38; 9/04E $1.51; 9/05E $2.03
Calendar Year EPS: 12/02A $1.09; 12/03E $1.16; 12/04E NA; 12/05E NA
OPINION
We wanted to provide an update on the risks to QUALCOMM shares as they relate
to the CDM A opportunity in India, especially in light of the recent activity
in the stock. As all private and public operators have chosen CDMA for their
limited mobility launches, we believe Qualcomm should materially benefit from
CDMA unit growth over the longer term (2-4 years) in India. However, we
believe that expectations for this opportunity have underestimated the near-
term risks.
In the near-term we expect Reliance's initial subscriber number (to be
released in April, which is the end of their trial launch period) to be a
relatively strong number. We estimate this number could easily be greater
than 1 million subscribers as Reliance is driving a strong push to get
employees and friends and families of employees to sign up for service.
However, despite a strong initial subscriber number from Reliance as well as
a 100% booked March quarter (with respect to chipsets) we have 3 concerns for
the CDMA market in India: (1) subscriber growth flattens after initial push
to sign up employees and friends/family of employees; (2) the 3-year upfront
payment is a sales hurdle; and (3) the Reliance price advantage has recently
come into question with the introduction of an interconnection fee.
Based on our concerns (described below in greater detail), we recommend using
strength in the shares related to the fully booked March quarter and
potential for greater than 1 million CDMA subscribers in India to come on-
line by April 03 to lighten positions.
Although we continue to believe QUALCOMM remains the best positioned wireless
equipment company to benefit from the move to 3G technologies over the next
3-5 years (as all 3G paths are based on the company's patented CDMA
technology), we believe the timing of this catalyst remains too far into the
future as we feel 3G (particularly WCDMA) is unlikely to have a material
impact until 2H04. Furthermore, we feel with our outlook for a deceleration
of chipset sales in Fiscal 2H03, increasing risks from important growth
markets (i.e. India and China) and tough comps for the Sept and Dec 03
quarters that the negative momentum in the stock is likely to continue.
Therefore, we recommend investors remain on the sidelines in the near-term
until the negative momentum works itself through the stock.
We have an Underweight rating on the sector.
RELIANCE'S PASSION NOTWITHSTANDING, THE BUSINESS RISKS ARE REAL
Reliance, a private operator, is the country's most ambitious purveyor of
CDMA limited mobility having begun a national soft-launch launch at the end
of December 2002 with a 250,000 sales force and a massive advertising
campaign (in some places, a Reliance ad appears about every 2 minutes).
However, despite the company's very lofty ambitions for telephony in India,
we have three concerns near-term as relates to QUALCOMM's 7 million unit
estimate for India in 2003. These are (1) subscriber growth flattens after
initial push; (2) the 3-year upfront payment is a sales hurdle; and (3) the
Reliance price advantage has recently come into question.
The big question is How many subscribers will the company recruit by April
when its service is planned to be commercial? We think an even more
important question is What are the quality of the subscribers recruited? We
believe it is unlikely that we will obtain actual subscriber data from
Reliance until April and estimating the number is more of a guessing game
than a scientific endeavor. That being said, however, we believe that the
figure could be 1 million or even greater. But the concern is Who are these
1+ million subscribers? We have learned that Reliance is converting its
employees, has extended a "friends of Reliance" offer where friends of
Reliance employees are being marketed and that even Reliance shareholders
(3.5 million) are being recruited to sign up for Reliance phones. After
this "low-hanging fruit" has been tapped, we question the slope of the growth
going forward as the sales agents will have to begin a "cold calling"
regiment for achieving further sales. Furthermore, the interconnection of
the Reliance network to the fixed and cellular networks could easily be
thwarted by these obvious competitors (we don't have to look beyond the U.S.
for examples of this).
Moreover, the Reliance pricing plan calls for a three-year upfront payment of
more than Rs. 20,000 (or more than USD $400). This fee is roughly equivalent
to the average annual income of an industrial worker in India. Additionally,
Reliance is actually offering a financing package to customers to pay for the
up-front fee. If a loan is necessary to buy telephone service for three
years, we have to believe sales will be challenging and that we should be
cautious about expectations.
Finally, as our colleagues (Anand Ramachandran and Amit Lodha) explained in
their January 27, 2003 note, the economics for Reliance are now in question
due to TRAI's mandates for interconnection usage charges (effective April
2003 - just in time for the commercial launch). When Reliance first
introduced its pricing plans, there were no interconnect fees for terminating
on cellular and fixed networks. If implemented, the new mandate imposes
charges for terminating WLL-M to cellular and WLL-M to fixed calls (Reliance
to Reliance calls are not affected and would not carry a termination fee).
As a result, Reliance is even more dependent on expanding its own base to
keep its economics in tact. But near term, given the 40 million fixed line
users and 10 million cellular users (and WLL-M users are negligible), WLL-M
callers will initially be terminating calls on fixed and cellular networks.
(These fees range from Rs. 0.30 to 0.60 per minute for local calls). Should
these termination fees get passed on to the WLL-M subscriber, the favorable
price differential for WLL-M service compared to cellular or fixed is
lessened. This, together with the 3 year upfront payment, could slow down
subscriber growth, in our view.
VALUATION
Our $36 price target is based on roughly 28x our FY03 EPS estimate of $1.30.
We believe WCDMA timing concerns as well as the fact the main growth driver
for CDMA handsets over the next 12 months is coming from riskier markets with
limited visibility (China, India and Latin America) will continue to weigh on
the stock. Our multiple is a discount to QUALCOMM's adjusted historical
average forward multiple of 43x (which excludes the hyper-valuation periods
of 1992-1993 and November 1999 -- April 2000 -- time periods we do not
believe are very representative) to account for the current market
environment as well as the increased risk profile of the company's growth
prospects over the next 12 months. Despite these concerns we believe the
stock can still command a strong valuation multiple in the current
environment given the wireless industry has a future growth phase (the
adoption of data) and QUALCOMM's central position in that phase as all next-
generation wireless solutions are based on its patented CDMA technology.
RISKS
We believe the risks to our opinion are as follows. (1) We have
underestimated the growth profile and pricing level for 2nd tier markets,
such as China, India and Latin America. (2) There is unexpected growth in
CDMA handset and chip units from technologies such as GSM1X or WCDMA.
Although these are very unpredictable outcomes we feel these are unlikely in
to make a material impact in 2003 as QUALCOMM has continually stated it is
not expecting a market for either technology until 2004. (3) The overall
strength in the stock market continues. Given QUALCOMM's high beta multiple,
overall market strength could carry the stock higher despite our concerns for
growth and valuation.
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