Qualcomm Inc (QCOM)

[khemara_qc]

Qualcomm 'Uniquely Positioned' For 3G Growth
06.06.05, 2:43 PM ET


http://www.forbes.com/markets/2005/06/06/0606automarketscan15.html?partner=yahootix&referrer=

Goldman Sachs initiated coverage of Qualcomm (nasdaq: QCOM - news - people ) with an "in line" rating, saying the stock is most feasible for long-term holders. "For long-term holders, we expect strong upside as Qualcomm benefits from 2006-2007 3G ramp. . .upside beyond 10% to 15% in the near term, in our view, would require a resumption of positive 2006 earnings momentum, which we believe is unlikely until mid-2006; our bottom-up carrier analysis suggests near-term W-CDMA adoption data points will be in line with to below expectations, leaving little catalysts for upward revisions. As a result, we believe investors should take a longer-term view to fully capture what could be a 30%-plus move in the shares, rather than try to time the inflection in 3G adoption to the quarter." Goldman estimates fiscal 2005 earnings of $1.11 per share--penny below the Street--on sales of $5.5 billion, a 9.9% growth in sales. Goldman sees Qualcomm's 2006 earnings are seen at $1.44 per share--slightly ahead of analysts--on sales of $6.9 billion, a 24.7% growth in sales. "We differ from consensus on two key issues: our 2005 3G phone forecast is 5 million units below the 50 million consensus, but our 2006 estimate is higher, and we forecast lower near-term margins in Qualcomm's chip business due to competitive pressures." In light of the significance of Qualcomm's intellectual property control in 3G standards, Goldman claims that the company "is a uniquely positioned investment on the growth in 3G wireless," and that Qualcomm is poised to earn a 4.3% royalty for every 3G handset purchased (wholesale price). "As 3G adoption ramps, Qualcomm should capture this royalty stream from an increasing share of the 790 million unit handset market in calendar 2006. In addition, Qualcomm should be able to capitalize on the rollout of 3G as one of the leading suppliers of semiconductor chips and software for handsets. Although Qualcomm currently has a small percentage of the W-CDMA chipset market as a supplier to handset OEMs such as LG Electronics, Samsung, and Sanyo, we believe that its strong wireless R&D effort will allow it to improve its W-CDMA semiconductor market share to 20% by the end of fiscal (September) 2007 (versus our fiscal 2005 estimate of 12%)." As for competition from Nokia (nyse: NOK - news - people ), Goldman does not see it claiming the same market share for 3G as it does 2.5G, but said "the greater risk from Nokia is [its] ability to inflict pricing pressure in the 3G market," hindering Qualcomm's royalty revenue and W-CDMA chip share potential.