Qualcomm Inc (QCOM)

[khemara_qc]

Qualcomm grows up

http://money.cnn.com/2004/03/23/technology/techinvestor/lamonica/index.htm

Everybody's favorite speculative stock in '99 is now a solidly growing (and dividend-paying!) tech.
March 23, 2004: 2:25 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - The Mighty Q is back.

Qualcomm, a Wall Street darling at the height of the tech bubble, late last month issued extremely bullish guidance for its fiscal second quarter. And shares have enjoyed a solid run this year, up nearly 16 percent.

There appears to be more upside ahead.

Qualcomm (QCOM: Research, Estimates) has a few things working in its favor right now, most notably the arrival of so-called third generation or 3G wireless services, like video and audio files.


That should drive demand for cell phones -- and for Qualcomm's chipsets used in phones that run on the code division multiple access (CDMA) standard.

There are other standards, most notably GSM, which is used by AT&T Wireless, Cingular and T-Mobile, as well as most European cell phone carriers.

But CDMA is gaining in popularity in Asian markets, and in the United States, Verizon Wireless and Sprint PCS have adopted it. "People are recognizing there is viability in multimedia. CDMA affords higher bandwidth for delivery of new broadband services," said Michael Davies, managing director with Investec.

On a roll
At this week's widely watched CTIA wireless trade show in Atlanta, Qualcomm was featured prominently in some noteworthy developments.

Nextel, known for its push-to-talk walkie-talkie like service, said it would be testing phones using Qualcomm technology known as QChat. This could help make Nextel's push-to-talk feature more compatible with phones running on CDMA networks.

Qualcomm also forged a deal with graphics chip company ATI Technologies, which could lead to more advanced video games on phones and other wireless devices.


Finally, Qualcomm and Real Networks announced that Qualcomm chipsets available in the second quarter of this year will allow customers to play and stream RealAudio and RealVideo media files on wireless devices.

Add all this up and you have a scenario where consumers are expected to upgrade cell phones much more quickly than they have in the past, said Greg Gorbatenko, an analyst with Marquis Investment Research. That translates to more revenue for Qualcomm.

"Qualcomm is sitting pretty," said Gorbatenko. "It has the best technology in a growing industry and handsets are taking off like crazy."

The company even could benefit if GSM phones do well. Qualcomm has patents on many CDMA-related technologies and it receives license royalties from companies using a technology known as wideband-CDMA (WCDMA) in more advanced GSM phones.

"Qualcomm is collecting profitably on intellectual property," said Kenneth Leon, an equity analyst with Standard & Poor's.

Is the stock still attractive?
Here's a quandary, however. Qualcomm trades at 36 times estimates for this fiscal year. Is that too pricey? After all, when I cited Qualcomm as a tech bargain in a column last May, it was trading at just 22 times forward earnings. The stock has since doubled, from $30 to more than $60.

But why quibble? Qualcomm may no longer be "cheap" but I think it deserves a premium because of its market position.

Plus, earnings are expected to increase 23 percent this year. And if anything, estimates might be too low now since Qualcomm should face some relatively easy comparisons in its next few quarters, according to Leon. That's because at this time last year, Qualcomm and other wireless components companies were faced with a cell phone inventory glut in China. The SARS outbreak exacerbated the problem.

Qualcomm has come a long way from being the quintessential poster child for irrational exuberance in tech stock investing. Remember 1999, when shares of Qualcomm surged 2,619 percent? The $1000 price target?

Well, the company never reached $1000 ($250 post-split) but Qualcomm is now a stable company that continued to innovate during the downturn. The company has done a much better job than others of emerging from the tech quagmire.

(In case you haven't noticed, I've been trying to see how many Q words my editor will let me get away with in this piece. By the way, aren't quesadillas quite tasty?)

What's more, the company pays a dividend now. It even increased it by 43 percent last month.

Sure, the yield is still relatively tiny, at about 0.6 percent. But Qualcomm has about $5.9 billion in cash and investments and just $117 million in long-term debt. So further dividend increases are not out of the question.

So here's one more Q word I'd use to sum up Qualcomm: quality.

Analysts quoted (another Q word!) in this piece do not own shares of Qualcomm and their firms have no investment banking relationships with the company.