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

To: qveauriche who wrote (128792)	5/8/2003 1:33:46 PM
From: Stock Farmer	Read Replies (2) \| Respond to of 152472

Good (long) post Qveau... several points worthy of subsequent discussion. Time doesn't permit a complete response now... maybe later. However a few highlights. I understand the primary complaint you and John have about QCOM is the valuation, and an insistence that such a consideration must be made on the basis of the GAAP # and not the operating number. I would prefer to be characterized differently. Yes, my complaint is valuation. The basis of valuation has less to do about "GAAP" versus "Operating number" than it does with economic profit. Which is the sum of discounted free cash flows. And I presume that you will agree with me that a company does not make me any wealthier by taking money I used to have and giving it back to me. This just moves my wealth around. Nor does it make me any wealthier if it sells my assets and gives me the cash value that they were worth in the first place. This just makes me more liquid. And finally, if the company liquidates assets in the process of operations and then invests these liquid assets in the process of financing, then I don't even get to enjoy the benefits of liquidity. Particularly if the re-frozen assets end up subsequently being tallied as "strategic". [And written down to zero!] Movement of wealth and liquidation of assets are not generally a wealth-enhancing thing. So when I perform a valuation exercise, I am very careful to watch the rate at which real wealth is being increased. Net of wealth being spent, consumed or otherwise disposed of, and not inclusive of wealth being moved from pocket to pocket. This, therefore is the biggest point of departure I have with the folks who would simply look at the "operating number" and try to declare a result. On your points: 1... The operating number therefore is a more accurate predictor of the GAAP numbers to come. Possibly. However I suggest you review the segment information in the balance sheet and review the disposition of assets. What fraction of Qualcomm's current assets are classified as "strategic", and if these do indeed represent legitimate marketing expenditures and we can expect them to go to zero, there is a lot more waiting to disappear off of income in the future than was written off this last quarter. And 1 The capital commitments being made by major, heavy hitters to enter the CDMA chip market is, you must agree, at least a validation that did not previously exist ofCDMA 2000's place in the future of wireless. Yes. It is also an indication of deterioration in Qualcomm's monopoly position. The issue is not whether the pie gets larger, but the size of Qualcomm's slice of the pie. The number of chip suppliers does not increase number of wireless consumers. And unless I misread the thread, the thesis behind a high valuation is that CDMA of one form or another will be in every device. So what we are seeing is validation of this premise without increasing the size of the market. More entrants therefore are threatening to squeeze Qualcomm's revenues. To your point 2: 2. The other point that's often overlooked in all the table-pounding over GAAP is that QCOM's policy is to recognize unrealized losses through writedowns, but not unrealized gains. To the extent that the sudden emergence of several big-name chip competitors bolsters the probabilty that CDMA growth lies ahead, then the value of QCOM's patent portfolio must be seen as having risen as well. This "unrealized gain" appears nowhere in the GAAP number. To the extent that the writedowns have any significance at all, it would appear that ,dollar for dollar, the assets increasing in value are every bit as important to a determination of an overall value for the company. Yes. I would only add that one must contemplate liabilities and dispositions in the total. But otherwise we are in substantial agreement. I suggest you review the rate at which shareholder equity net of paid in capital is increasing. You might be surprised. Your (3) has already been substantially addressed. As to (4): ...In fact, wouldn't it be more accurate to calculate QCOM's p/e ratio as being a multiple of the stock price LESS cash per share. Cash is cash. Dollar for dollar. It's made already and net of corporate taxes. What we really need to look at is the what we're paying for the operating business itself. Which is only about $25 per share. Depends on what you want to say. The same argument might be held for Cisco, but in an even bigger way. However, when we look at the absolute rate of increase of distributable shareholder wealth... it is not increasing at a rate that would justify paying $25 for the rights to own it all. Your (5) I do not understand. As to the impact of competition on QCOM's growth rate, no one seems to have much confidence in the value of QCOM's CDMA intellectual capital, which should enable QCOM to remain far and away the market leader in the growing CDMA market. If my son is the market leader in the growing summer lemonade stand market, that doesn't necessarily mean he's worth a lot. Particularly if it's costing him as much as he's making to maintain his market leading position. I'm out of time for the moment, but will address the points [6]+ later. Regards, John

To: qveauriche who wrote (128792)	5/9/2003 8:06:58 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 152472

hi qveau, great post. i am still trying to grok it all and it will take some time. better for me to respond in dribs and drabs... I understand the primary complaint you and John have about QCOM is the valuation, and an insistence that such a consideration must be made on the basis of the GAAP # and not the operating number. i'm not sure GAAP holds all the answers. after all options are just a footnote in GAAP. but i think it is rather convenient of QCOM to separate the investment arm from the operating arm at this time. in a way, it's almost better if QSI was all boondoggles, because that means it is just the fault of a stupid management which could (theoretically) be replaced. but if one takes the perspective that QSI was (and is) truly necessary for CDMA penetration, then indeed i believe it is inextricably linked to the operating results. taking this perspective, the "seed money" provided by QSI investments are a little like AOL sending out millions of signup disks way back when. AOL chose to capitalize those costs as opposed to expensing them (for which they received a lot of flack right before they became a big success), but even capitalizing them, one must write down their value over time. likewise, if QSI investments were legitimate and intelligent "strategic investments", then they seem to me to be capitalized expenses which should be depreciated in understanding the economic value of QCOM. The other point that's often overlooked in all the table-pounding over GAAP is that QCOM's policy is to recognize unrealized losses through writedowns, but not unrealized gains. well, they are just doing what they are required to do according to GAAP in writing down assets that have "substantially depreciated". but since nobody pays attention to GAAP, what difference does it make? the writedowns don't show up in the pro forma numbers QCOM trumpets. (as an aside, i will note that i don't think QCOM is by any means among the worst practitioners in terms of the "writedown game". i have been astounded by the way some companies doing a lot of acquisition characterize their new assets largely as goodwill, then write them off whole hog as "one-time charges" ignored by the market. what remains is real assets picked up on the cheap in accounting terms, even though the reality is different.) To the extent that the sudden emergence of several big-name chip competitors bolsters the probabilty that CDMA growth lies ahead, then the value of QCOM's patent portfolio must be seen as having risen as well. This "unrealized gain" appears nowhere in the GAAP number. keep in mind that the patent portfolio is an intangible asset. that it is an intangible asset of real value is apparent from QCOM's high operating margins and its high price to book value. think of another company with significant intangible assets: Coke. the Coke brand is a great intangible asset, the most commonly recognized brand in the world. Coke gains excellent monopoly rents from this asset just as QCOM does from its patent portfolio. Coke sustains its brand through advertizing, which it expenses. likewise QCOM sustains (or did, anyway) the commercial value of its patent portfolio by encouraging CDMA penetration through QSI. this likewise seems to me like a cost of sustaining its monopoly rents, i.e., a cost of doing business. in any case, Coke does not declare quarterly "gains" on the value of the Coke brand, even though everybody knows it's incredibly valuable. where the Coke brand benefits investors is in the operating advantages it affords Coke against its competitors, which appear in the form of superior margins; and on the stock side, in the form of a high price to book value. if QCOM were to somehow "mark to market" its patent portfolio, then it would have a heavy asset ledger. its price to book would be LOWER because its book would be higher. thus nothing would be accomplished, except time and energy would be wasted trying to assess the nonmarketable intangible value of the asset. perhaps i didn't say this in the most eloquent fashion, but i hope it gives you some new ideas for thinking about QCOM's portfolio. the gist is: just because it's not carried on the books at full value doesn't mean the market doesn't value it fully!

To: qveauriche who wrote (128792)	5/9/2003 10:17:13 AM
From: Stock Farmer	Respond to of 152472

Reply - continued (6) GSM Chips. Yes, this is an area of growth for QCOM. Ignored by bulls and bears alike. The bulls keep going on about pending high CDMA penetration, when in reality QCOM could do well with low penetration just high enough to make a market for multi-mode chip sets. So far I am watching for this, and if you recall a post of mine a year or so ago I was positing this as the legitimate strategic reason behind the QSI boondoggles: get CDMA as a significant presence in every geographical segment, to ensure regional markets for multi-mode handsets. I think the success of this strategy is being somewhat mitigated because manufacturer economics and business realities mean they are forced into differential product lines anyway. Cost is an issue and so they don't want to pack any more functionality into the handset than is absolutely required by the market segment targeted by the handset. Another thing to consider is the existing rate of sale of multi-mode chip sets, and that these already contribute to revenue. So we can't assume that Qualcomm's revenue is going to go up as a factor of CDMA penetration, but by less. Maybe some of the acronym specialists on the thread can dump these numbers for us. Seems to me that license revenue is driven by CDMA penetration, and chip set revenue may be driven by both CDMA and cross-over (multi-mode) effects, but we have to ensure we don't try to scale chip set revenue potential by as much as license revenue potential. (7) Uncounted growth? Anybody who is ignoring growth in the wireless market would probably have a buy price on Qualcomm less than $10. So I have a difficulty believing wireless market growth is being ignored. The issue with counting on revenues from developing countries is that we have a volume X price relationship. And while this represents increased volume, it does not come at the same price. A gadget toting North American technophile can afford to throw away his $500 phone every 6 months to get the latest thing to impress girls (ok, other geeks) at parties. But your average rice farmer? Perhaps not. Easy for us who chat back and forth on SI to forget that we represent an income and standard of living 10x greater than half of the planet, and extrapolate our values and behavior erroneously onto that half. World cellphone market is close to saturation. Not because everyone on the world has a cellphone, but because supply (at current prices) is catching up to demand (at current prices). 8. $1.58 earnings on $31 stock? If you have a stock at $31 which has increased the wealth of shareholders by about $0.56 in the last six months (before any writedowns by QSI!), you might not value that as highly as a company which you think is increasing the wealth of shareholders by $0.79 in the same period. You might want to take off about a third of the market cap. Which appears to be in progress. 9. You a nutcase? No. Nobody can rightly call you a nutcase. There are two things in discussion here, and often they appear to be one. When you are discussing Qualcomm and remarking on the great potential, I am discussing QCOM and suggesting that the potential is not so great. The one depends on leveraging a patent portfolio across CDMA. The other depends on price. These are different things, linked by market dynamics. Regards, John