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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Jill who wrote (860)	3/28/1999 8:55:00 PM
From: Mike Buckley	Read Replies (3) \| Respond to of 54805

I've got some final thoughts (final for this weekend :) after more research of the Q. In bed with Sony After reading more of the 10k, I learned that Sony is not only a major investing partner but also a significant customer. The part of the story that shows who the Q is sleeping with is that Qualcomm owns 51% of a joint venture with a subsidiary of Sony to manufacture ASICs and subscriber products. Those are the products that produce the lion's share of the Q's revenue. Sony knows just a little about manufacturing. :) The other part of the story is that the joint venture sold $680 million of product to Sony Electronics in FY98. Due to the Q's share in the joint venture, half of that is directly attributable to the Q's top line. That portion was $340 million, almost 10% of total revenue. Stock Valuation After the stock's two-day rise in reaction to the deal with Ericsson, it is priced at a PE that is 50% greater than its expected earnings growth rate for the next two years. My experience in looking at gorilla candidates is that a similar premium is an everyday situation. When the PE is twice the estimated growth rate, that becomes borderline pricey even for gorilla candidates of small and mid-size companies in this hot market. When the PE is is the same as the estimated growth rate it might be a relative bargain. (To put that into real-world context, I did recently make a killer purchase of an applications gorilla candidate that was selling at a PE that was only one-third of the estimated growth. A few months later the stock had increased 125%.) To add complexity to the stock valuation, I can't think of any companies to compare the Q with. (Help with that would be greatly appreciated!) Their 3% profit margins are low compared with other gorillas, potential and otherwise. Their operating cash flow is not yet positive, though it's not a relatively huge drain on capital. Analysts haven't had time to revise estimates in reaction to the deal with Ericsson. As part of that deal, the Q gets rid of the money-losing infrstructure business. That should help earnings in the long run, though there will be a short-term charge we'll have to keep in perspective. An increase in estimated earnings will lower today's relative market premium. In summary, there is a complex mix of positives and negatives when trying to value the Q, atleast to my way of thinking. (Don't blast me for attempting to bring quantitative valuation into a discussion of a gorilla candidate. I realize it's blasphemy according to the authors.) The Long Term There are very few opportunities to buy potential gorillas selling enabling technologies. Almost all potential gorillas sell applications technologies, not enabling technologies. Additionally, I don't have to remind anyone reading this folder that the biggest of the big gorillas got that way selling enabling technologies (Cisco, Intel and Softie.) Understanding that, does anyone wonder why I keep the Q on my radar screen? It's nearly impossible to know how to value the Q. Enabling technologies are much more risky because there are so few winners. That's part of the reason the Gorilla Game authors suggest limiting risk by waiting until the start of the tornado to buy the stock of a company selling enabling technologies. On the other hand, one enabling winner held for a couple decades will reap investors the kind of rewards that most people only dream of. Will the Q really become the Intel of the wireless biz? As someone recently pointed out, futurist George Gilder thinks so. Most important to me is that the Q is the only pure play I know of that has a strong foothold in wireless enabling technology. The other competitors offering their various twists on CDMA, not to mention competing GSM and TDMA technologies, are the big boys that John and others have mentioned. Every one of them is a customer of the Q, so it will be a double whammy if their competing technology wins out over Qualcomm's innovations of CMDA. Long-term Investing Strategy History shows that if you believe in the Q's potential as an enabler, ignore the wild fluctuations in the stock price that are sure to follow as has happened over the years with Cisco, Intel and Softie. Ignore the market's temporary reactions that drive the price of the stock up and down. Again, if you believe in the power of this enabling technology and everything that goes with it as outlined in the Gorilla Game, focus on product adoption, the value chain and the high cost of switching -- not the price of the stock or temporary fluctuations in the grow rate of the EPS. Just my opinion. --Mike Buckley