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

To: bdog who wrote (9337)	3/24/1998 2:24:00 PM
From: Gregg Powers	Read Replies (5) \| Respond to of 152472

bdog: Not to pontificate (and I am being general here), but the current market environment is particularly scary because many of the people who claim to be long-term investors actually view the process on a day-to-day basis. They are "investors" as long as their portfolio is appreciating daily and God forbid that one of their holdings underperforms for a day, week, month or quarter. Sure, over the last twelve months, it would have been more "fun" to own Lucent than Qualcomm; but, I am not inclined towards second guessing myself. LU is now valued at almost $90 billion and is trading at 3.5x trailing revenue and 40x the Street's average guess for FY-98. Lucent is a fine company, but at this stage in the bull market, investors are paying an extraordinary premium for predictability, visibility and liquidity. With twenty-twenty foresight it might have been possible to anticipate this phenomenon and participate. However, as a value-investor I couldn't make a strong case for LU at $70 and I certainly don't understand the risk-reward equation today. With respect to Qualcomm and my perception of its gross undervaluation, I think I can summarize the Street's view pretty succinctly. Wall Street bulls lack near-term earnings visibility, which to them implies that there is an uncomfortably high probability that they could be made to look stupid on April 21st. Since analysts by-and-large measure their penis size by the accuracy of their quarterly estimates, few are willing to stick their "necks" out at this time. Meanwhile, the bears continue to harp on Asia in general and South Korea in particular. They pontificate about everything that can go wrong: Korea tanks (again), Samsung doesn't buy any chips, Samsung makes it own chips, price competition destroys the handset market, the infrastructure business won't turn profitable--blah blah blah. Despite a paucity of evidence to support these arguments, such negativity gains credence given current psychology and the absence of near-term earnings momentum. Thus, the current price represents a balance between "tactical speculators" and "strategic investors". Tactical speculators (like Candle stick) are, by their nature, extremely short-term oriented. They are looking for the next uptick or downtick; the next quick 10%-20%. Clearly the short-sellers in QC either fall into this category or simply don't understand the company's fundamentals. The strategic investor is not preoccupied with the next quarter, or the stock performance over the next three-to-six months. He (hopefully) understands the long-term opportunity and views price weakness as a chance to increase his ownership at favorable prices. He is focused on inevitabilities such as the deployment of CDMA, its rapid growth into the foreseeable future, and the virtually unassailable position that QC has as the locus of this technology. He understands and accepts near-term "dead money risk" because his professional experience has taught him that it is impossible to "time" inflection points. Psychology can change so rapidly that the opportunity to acquire "cheap" stock can disappear overnight. The reasons can arise unexpectedly: earnings visibility can improve, a major contract could be awarded, the company could be acquired, so on and so forth. Such patience is a virtue under fairly specific circumstances. The business must be an improving asset. This means that development must be such that corporate value is increasing year-over-year (notice I didn't say quarter-to-quarter), widening the discount to the company's private market value. Let me frame this. I think I can make a salient case that QC is worth roughly $100 today. Moreover, I think that corporate intrinsic value is increasingly rapidly, particularly given the accelerating pace of worldwide network deployments. Based on my model, I believe that QC will be worth north of $150 by the end of Fiscal 1999. Therefore, on a private market value basis, my investment is appreciating at an extremely attractive rate even if this is not currently being reflected by the stock market. Thus while a higher stock price today would be psychologically pleasant and would validate my analysis--my thought processes are not so fragile as to require immediate affirmation. I personally hope that QC management spends little time worrying about Street misperceptions. For the most part, sell-side analysts are reporters who provide little in the way of critical thinking and perspective. When quarterly earnings visibility becomes clearer, and the slope turns rapidly northward, all the current negativity will vanish as though it never existed. The boys will revise their numbers upwards and print copious "buy" recommendations--in the meantime, management can talk itself blue-in-the-face trying to educate and illuminate. Such would be a terrible waste of bandwidth that does nothing increase underlying corporate wealth. Hope this is helpful, Gregg