Is It Worth Holding for Qualcomm?


In 1997, a company little known outside of Southern California paid $18 million to rename the Jack Murphy Stadium in San Diego the Qualcomm Stadium. Home of baseball's San Diego Padres and the NFL's San Diego Chargers, the stadium has since given the company exposure to millions of football and baseball fans.

Dubbed the "Q" by locals, the arena was part of a broad branding strategy to vault the company, which licenses digital technology and designs equipment and software for wireless networks, into the front ranks of tech stardom. It seems to have worked. Between 1997 and the beginning of 2000, Qualcomm's (QCOM) shares rose from $10 a share to nearly $180, as hopes for wireless networks soared. Even today, after the high-tech bubble burst, the company is still trading near $65 a share. But the "Q" has also become an apt wordplay on the company's state of play: stuck in a wireless waiting game.

Wireless carriers have pushed back the ballyhooed rollout of advanced wireless third-generation (3G) networks to 2004 and 2005. The 3G networks are largely based on Qualcomm's wireless technology. Meanwhile, cell-phone chipset sales, accounting for more than half of the company's business, dropped off due to the weak economic climate. The bottom line: Although Qualcomm's long-term prospects are good, analysts say it faces a slew of medium-term headaches.

SLOW ROLLOUT. For starters, there's the 3G problem. Heavy-hitters such as NTT DoCoMo (NTDMY) and Korea's SK Telecom (SKM) have put off their network deployments. Qualcomm is "going to make money when 3G rolls out, but it's not going to be as much money" as expected, says Edward Snyder, analyst with J.P. Morgan Chase, who has a long-term "buy" rating on the stock. Why will Qualcomm be less of a cash cow than expected? The business case for 3G is looking more uncertain. While carriers have already invested billions of dollars into 3G, they're having trouble finding ways to recoup their costs.

Paul Jacobs, president of Qualcomm's wireless and Internet group, counters that the delays were expected, and that most relate to carriers implementing one of Qualcomm's advanced technologies, WCDMA (wideband code division multiple access). Says Jacobs: "We had always been looking at it as a system that had a little more time required."

That may be, but analysts caution that slow implementation of WCDMA will slow Qualcomm's annual revenue growth for the next few years to somewhere between 10% to 20%. That's off from earlier growth expectations of 30% per annum. Says Snyder: "I don't think [the stock is] going to be big at all in the next few years. There's no catalyst out there." Over the past six months, Qualcomm's stock has held relatively steady. But Andrew Cole of telecom consultancy Adventis worries that the company could "get hit" when Wall Street begins to focus on the 3G delay.

ROUGH TIME. Slower 3G deployment isn't Qualcomm's only headache. Competition in designing the wireless chipsets that run cell phones -- a business Qualcomm recently decided not to spin off -- is growing. While Qualcomm commands a dominant market share of more than 70% in chipsets, Motorola (MOT), Nokia (NOK), Texas Instruments (TXN), and Intel (INTC) all have their sights on this sector, says Scott Searle, analyst with SG Cowen Securities.

Overall, semiconductor revenue from wireless handsets will grow at 26.5% a year through 2005 -- industrywide revenues are projected to reach $27.9 billion in 2005, estimates Allen Nogee, senior analyst at communications consultancy Cahners In-Stat Group. The estimate is nearly half of market projections just a year ago due to the drop in chipset prices and slower cell-phone sales, says Nogee.

The increased competition comes at a rough time, just as the stagnant economy has seen the wireless-chipset business hit by slowing sales of cell-phone handsets. Qualcomm just lowered its chipset forecast for the year from 80 million units to 75 million units, and. J.P. Morgan's Snyder expects further forecast reductions, to 65 million units. For its part, Qualcomm anticipates any declines to be offset by increased licensing revenues.

A BETTER TOMORROW? Analysts also take a jaundiced view of Qualcomm's vaunted penetration of cell-phone markets in China and India. In those countries, 50% of the population earns less than $2 a day -- hardly viable markets for cell phones, they say. In China, about 104 million people use GSM-standard wireless phones, vs. about 100,000 subscribers using rival CDMA systems licensed from Qualcomm, says Snyder. And Europe, where wireless services are well entrenched, remains staunchly in the GSM camp with no signs of movement towards installation of CDMA.

There are some bright spots for Qualcomm. Analysts expect the company to prosper in Latin America, which remains one of the world's fastest-growing mobile markets, according to the International Telecommunication Union. And with many countries facing overloaded voice networks, Qualcomm might be able to sell licenses for CDMA versions that can handle more calls. Investment bank Merrill Lynch predicts Qualcomm will boost its CDMA licensees in the September quarter.

Many on the Street like what they see in Qualcomm, no question about it. The company beat revised expectations for its third fiscal quarter of 2001 by a penny on July 26. In that period, Qualcomm posted a loss of $275 million, or 36 cents a share, on revenues of $640 million. That's down from the same period last year, but better than the results of many other companies involved in wireless infrastructure.

LONG-TERM PERSPECTIVE. Overall, while wireless could be down slightly in the third quarter due to the general economic weakness, it's expected to pick up in December, says Keith Bachman, an analyst with investment bank ABN AMRO. The company expects pro-forma revenues to increase 10% on the third fiscal quarter, with pro-forma earnings reaching 25 cents a share, vs. pro-forma earnings of 22 cents per share in the third quarter.

In the near term, Qualcomm will be "a choppy stock," according to Banc of America analyst Mark McKechnie. "This is a stock you want to own below $60 [a share] and sell in the mid-$80s," says Marc Klee, portfolio manager of the $1-billion John Hancock Technology Fund.

All in all, however, plenty of long-term investors think Qualcomm is well worth a look. As chipset sales increase and 3G is deployed, many analysts see the company's stature improving. "We think the future for Qualcomm is bright," enthuses Bachman. Investors might just have to soldier on for a few years to see that sunshine. By Olga Kharif in New York


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