Looking down the list of Rule Maker companies, I'm at a loss to find one of the most celebrated technology stocks of the last few years -- Qualcomm (Nasdaq: QCOM). Every investor dreams of discovering a stock like this. Its undiscovered patent portfolio and wireless industry foresight went unnoticed until early 1999 and then -- whoosh -- straight up for a 2,600% return in 1999.
Bill Mann first addressed Qualcomm's standing with the Rule Makers in a January column. For the most part I agreed with his views, but one thing has changed since then. Qualcomm has come down from $162 (near its all-time high of $200) on the day of his report to around $67 today.
Bill liked the Qualcomm story, but shunned the lofty valuation and ludicrous expectation set by analysts: "Qualcomm has gorilla technology [in reference to Moore and Kippola's The Gorilla Game], for sure. But I would call it highly unlikely that the scenario painted in the analyst rating will come to pass." Now that the price is a little more reasonable (50 times 2001 earnings), let's take another look at how it matches up to the Rule Maker criteria.
I decided to concentrate on the Rule Maker criteria most relevant to the Qualcomm situation, so here goes.
Qualcomm is not the Qualcomm of old. Over the last year or so, it sold off its handset division, its infrastructure division, and is gearing up to spin off its chipset division (referred to as Spinco). CEO Irwin Jacobs is betting the farm on his patent portfolio and a few leftovers such as Eudora email, OmniTracs, and an investment in Globalstar (Nasdaq: GSTRF) that's looking shaky at best after missing earnings estimates on Monday.
Due to this corporate metamorphosis, historical numbers don't provide us with much insight into the future of the "new and improved" Qualcomm. As such, I applied the quantitative criteria to Qualcomm's pro forma (sans Spinco) financials and all were met except the Foolish Flow Ratio. Yet I am fairly confident that the high-margin royalty revenue that dominates Qualcomm's income statement will change that over the next few quarters.
It's the qualitative criteria that give me pause.
Take Dominant Brand, for instance. Grab 10 cell phone users off the street and maybe one could tell you what standard his phone uses. (For a good introduction to wireless standards, check out this story.) Qualcomm has some work to do here. It may be a household name with investors thanks to its performance last year, but it still lacks a dominant brand. Perhaps a branding campaign similar to that of Intel (Nasdaq: INTC) with "Pentium Inside" or Cisco (Nasdaq: CSCO) with "Empowering the Internet Generation" could do the trick.
Repeat-Purchase Business is a no-brainer with reports of the Japanese buying more than two cell phones a year on average and Nokia (NYSE: NOK) estimating that 40% of its revenue comes from upgrades. As the prices of cell phones decline, as they have with every other "killer app," business will only get better.
Convenience is yet another concern. There are two sides to this issue -- the supply side and the other supply side. CDMA chipsets are not hard to come by but the network infrastructure is. U.S. coverage is still patchy and some major countries in Europe, such as France and Italy, do not even have CDMA networks yet. It appears that it's just a matter of time before we see a worldwide CDMA network, but crystal balls are not an investment tool at The Motley Fool. We're always on the lookout for that discontinuous innovation that could uproot a Rule Maker's position.
I like the Expanding Possibilities for Qualcomm as well as for the wireless industry. CDMA technology is firmly entrenched as the leading contender for 3G wireless. Whether it is cdma2000 (Qualcomm's 3G) or W-CDMA (a cousin of CDMA developed by rival telcos), Qualcomm is poised to rake in the royalties. No doubt Qualcomm gets the point here, but can it dominate its market like a true Rule Maker?
Last year was a strong year for CDMA with 118% growth, but GSM is still the dominant standard with 60% of the worldwide wireless market share. CDMA's small percentage of the market should be viewed as a positive. There is still a tremendous growth opportunity. Investors got carried away last year. Now may be the time to look at some more realistic projections.
Estimates released by Nokia in their most recent quarterly earnings call are for 550 million worldwide handsets sales in 2001. 2000 is expected to come in between 400 million and 425 million handsets. How's that for expanding possibilities?
As for Your Familiarity and Interest, that's up to you -- but let me add one caveat. If you are going to invest in the wireless industry, plan on getting less sleep. Not because of the stock gyrations -- Fools don't worry about short-term fluctuations -- but because new technologies emerge each day with 15 different names for the same technology. Keeping up with the market requires a lot of reading.
This time it's not valuation that keeps Qualcomm out of the Rule Maker Portfolio, but rather several qualitative criteria. Fools can rest assured that we will continue to monitor Qualcomm's financials as well as its industry position. Look for a more in-depth look at Qualcomm from Motley Fool Research in December.
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