FOOL PLATE SPECIAL
An Investment Opinion
Horse Trading Hits Qualcomm

By Brian Graney (TMF Panic)
June 15, 2000

CDMA chipset maker Qualcomm (Nasdaq: QCOM) took it on the chin in early trading again today, suffering its second double-digit percentage loss in as many days. An umpteen percent loss here, an umpteen percent loss there. Pretty soon, these things start to add up and investors are suddenly discovering that last year's share price performance darling is underwater by some 65% year-to-date. However, Qualcomm's slide has not been of the slow, drawn-out variety as the company has lost over 40% of its market value over the past two months alone.

As is often the case during instances of rapid share price appreciation or depreciation, Qualcomm's stock is being affected by a confluence of factors.

Uncertainty about the timing of the roll-out of a third generation (3G) wireless network in China based on Qualcomm's CDMA technologies has been weighing on the stock for a while now, although the downward pressure has intensified in recent weeks as the Congressional debate over whether to grant Permanent Normal Trade Relations to China has heated up. Then a governmental handset subsidy repeal raised old but still lingering concerns about subscriber growth in South Korea, the company's largest end-market. And on the back burner is the issue of Globalstar (Nasdaq: GSTRF), a satellite telecommunications system Qualcomm has invested in and that some fear is about to pull an Iridium. To top it all off, there is this months-long Nasdaq "tech wreck" stuff that everyone keeps talking about.

Given that kind of backdrop, it didn't take much of a push to set off yesterday and today's big percentage slides. The nudge came in the form of a good, old-fashioned sell-side analyst fight, which was set off initially yesterday when a Bear Stearns analyst lowered his fiscal 2000 and 2001 earnings expectations for the company. A peer at Chase H&Q piled on this morning with more earnings estimate cutting and a somewhat unusual lower-than-market price target of $50 per share, saying there appears to be "no positive news in sight" for the company.

Meanwhile, other sell-siders continue to be bullish about Qualcomm's prospects, both in the near-term (the current quarter, in analyst-speak) and longer-term (anything after that). An analyst at First Union Securities reiterated his "strong buy" rating on the stock today, mirroring a similar action by an analyst at Prudential Volpe Technology Group last week. And in the past two weeks, the company has been upgraded to a "buy" by analysts at the unrelated investment houses of Edward Jones and A.G. Edwards.

The analyst back-and-forth is worth keeping an eye on for those investors trying to make heads or tails of Qualcomm's share price movements on a given day, regardless of how frustrating and unfruitful such a pursuit may be. In a very elementary way, every tidbit of news -- whether it has a real impact on the fundamentals of the business or not -- has the potential to rejigger the odds associated with Qualcomm's perceived chances of becoming an ultimate business success.

Just like the pari-mutuel systems adjusts the odds of a race horse based on the amount of money bet on that particular horse, the same system holds true for stocks as well. At its high of $200 per share earlier this year, the market was essentially giving very high odds to the probability that Qualcomm would dust the competition. While there is no way to make a direct comparison, maybe the odds were on the order of 5-4 or 6-5 at that time. And as any racetrack veteran can tell you, the potential payoff for a horse at 5-4 are a far cry from what a longer-shot horse at 10-1 or even 5-1 can return. That's why the stock was priced the way it was.

Today, Qualcomm's odds are being ratcheted down as folks are becoming less willing to place their money on the company's chances. However, with the stock currently priced in the neighborhood of 50x this year's expected earnings and 15x expected sales, the company is still fetching some pretty high odds even at its reduced price. Over the long-term, all of this talk of changing odds will be rendered meaningless as the day-to-day effects of the pari-mutuel system will give way to a stock that is priced in accordance to the fundamentals and cash flow generation ability of the underlying company. After all, Qualcomm is a business, not a race horse like Man O' War. But that doesn't mean its stock can't be priced in the same way in the short term.

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