DUMB LUCK INVESTOR: Qualcomm's Next Bounce, Peter D. Henig Monday March 7, 11:30 am ET
It's not a matter of if, but rather when? As in when will Qualcomm's (QCOM) stock once again start marching higher. Standar&Poors estimates it will reach $50 per share. Piper Jaffray, the investment bank, says $53. Still others claim the sky's the limit. When investors look at Qualcomm these days, optimism is riding high. In fact, its current trading range around $35 per share seems less like fair market value and more like a holding pattern before its next big bounce.
Though many in the wireless industry may not love the telecom giant given its dominant market position and its near monopoly status within certain technologies, investors who've tracked the stock! through its highs and lows are again seeing gold in Qualcomm's future. And there's no shortage of reasons why.
First, Qualcomm's 2004 profits of $1.7 billion were more than double its 2003 numbers. Second, its net profit margin last year was 36 percent, twice that of Microsoft's (MSFT) and well beyond its industry competitors. And third, though it already owns a major share of the total 2G (second generation) cell phone market – 240 million of the 1.5 billion handset market are Qualcomm CDMA phones – it is now poised to capture a major chunk of the market for 3G (third generation) phones as the 3G network rollout gains momentum.
The significance of this 3G rollout cannot be underestimated given that Qualcomm will make money on every single 3G handset sold. If it's a! full-on Qualcomm 3G phone, with a Qualcomm chipset using CDMA (code d ivision multiple access) technology, Qualcomm will get $20 per each phone sold. If it's not a Qualcomm phone, but uses some measure of CDMA or the new wideband W-CDMA technology, Qualcomm will rake in at least $9 per handset; thus, it gets paid no matter what. And the future gets even better. By the end of this year, 52 million 3G phones are expected to be in the market. And by the end of 2008? 352 million 3G handsets – and rising. (In fact, one of Piper Jaffray's primary reasons for raising its rating and price target on Qualcomm was the fact that it had previously excluded 3G revenue estimates from China – estimates the firm now expects to be significant and accelerating during 2005.)
It's no wonder that Qualcomm – twice!! – boosted its dividend by 40 percent last year, and is expected to at least do the same again thi! s year; with a further stock buyback program expected as well. With $8 billion in cash in the bank, it has plenty of money to do what it wants, while expanding into new markets and keeping competitors at bay.
That's not to say investors haven't struggled with the stock's ups and downs – mostly downs recently – and admittedly might not be inclined to believe a rebound is imminent until true growth numbers are actually delivered to their doorstep. For a stock that had previously traded as high as $44.99 over the last year (rising 60 percent in value in 2004 alone) Qualcomm sank like a stone in January 2005 amid speculation that the 3G market in India and China might not be growing as rapidly as first thought. Shares sank to a low of $30.60 and have hovered just a few points above those lows for much of the first three months of 2005. Some analysts even feel that the 3G story may already be largely discounted into the stock pr! ice. I don't agree.
I think with a few good numbers and a few good quarters it's back to the races for Qualcomm. Their revenue and profit generating position in the market far exceeds that of most, if not all, of their competitors and though gun shy investors may still bear some scar tissue from a market tumble of $180 per share during the tech bubble down to $15 per share during the bust, it might finally be time to put the past behind them. Whether investors will be looking to play Qualcomm bullishly through options, or by directly purchasing the underlying stock, will be up to them – but either way I wouldn't be surprised to see shares $15 higher than current levels by the end of the year. It's a bounce that looks bound to happen.
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