Qualcomm Inc (QCOM)

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DUMB LUCK INVESTOR: Qualcomm's Amazing Resiliency, Peter D. Henig
Sunday February 29, 11:30 am ET




At one point, presumably at the height of the technology boom, Qualcomm (QCOM) was forecast to become a $1400 stock. Not a $140 stock, a $1400 stock!! Discounted cash flow analysis had gone out the window and momentum was carrying shares through the roof. It never hit $1400 but it was a nice fantasy.

When the bottom fell out of the market, those who flew highest crashed the hardest – and Qualcomm was at the top, or rather bottom, of that list. Split-adjusted shares had climbed to nearly $200 per share in January 2000 before tanking to May 2003 lows of $29.58. The wireless promise hadn't changed, just the euphoria for it had. Over the last eight months, however, that euphoria – or at least muted enthusiasm as we might now call it – has crept back into Qualcomm's shares.

Share prices have risen over 100 percent and the stock now trades steadily above $60 per share. Wall Street's investment banks have even downgraded the stock for appreciating too much, with firms like Morgan Stanley reducing its rating from “overweight” to “equal weight” based on the amount of good news that has already been factored into the stock. And such good news has been abundant indeed.

Qualcomm easily beat analyst forecasts for fiscal first quarter 2004 profits, earning 43 cents per share, 3 cents above estimates and an increase of 46 percent from the same period last year. Revenue rose 13.2 percent to $1.24 billion from $1.1 billion, with sharp gains coming from the licensing fees on increased sales of its CDMA (code division multiple access) phones. With phone sales surging past industry expectations, Qualcomm further predicts revenue and earnings growth for Q2 2004, expecting that sales may rise between 1 and 8 percent over Q2 2003. Moreover, it now projects that net income for 2004 could reach between $1.41 and $1.46 per share, a major jump from $1.01 last year and sharply higher than the company's own forecast of between $1.17 and $1.23 per share it projected as recently as November.

All of this leaves investors with one simple question. What now? Wall Street has been so thirsty for a rebound in technology stocks it has been discounting good news for the entire year into share prices right now. And investors who watched with glee as their Qualcomm shares reached for the heavens, and then stuck by it as it sunk to its depths, are equally likely to take some profits for having weathered so much angst.

Yet, the best may be yet to come. Credit Suisse First Boston just last week reiterated its “outperform” rating on Qualcomm based on another company announcement that it was again guiding second quarter earnings expectations higher. Qualcomm now says it anticipates earnings of 47 to 49 cents per share – CSFB favors the higher number – well above the 34 to 37 cents per share it had previously estimated. Continuously improving handset sales into the second quarter and higher margins on its semiconductor business have buoyed the company's expectations and apparently even surprised Wall Street analysts intent on erring on the side of caution – lest no one blurts out another $1400 per share forecast by accident.

Can the good times last for Qualcomm? Unrealistic expectations aside, the answer is likely yes. With a very large chunk of cash in the bank – over $5 billion – and hardly any debt, the company is financially strong to weather any further turmoil in the market and should continue to capitalize on global growth of CDMA handset sales. Though the forward price-to-earnings (P/E) ratio is a bit rich at 34.8, and the PEG ration (the price-to-earnings growth ratio is a bit elevated at 2.51, the company could easily continue to raise earnings expectations throughout the year as wireless appears to be one of the few bulletproof technologies the business enterprise will need going forward. For investors who've stomached the worst, holding on for a bit longer doesn't seem like a bad idea.


Peter D. Henig
Contributing Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
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