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June 16, 2000
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The Same Old Situation
What's going on with Qualcomm is all too typical given the investment mentality most Wall Street types have traditionally brought to the table. The stock's recent collapse can almost completely be related to some highly unnecessary, poorly-grounded uncertainty permeating the market's opinion of the company's long-term potential. If the individuals on the street thought and acted rationally, then this wouldn't be a problem. Unfortunately, as intelligent as many of those who work there are, Wall Street has an irrational hatred of uncertainty.
Let me repeat that for you. Wall Street has an irrational hatred of uncertainty. The i-banks, brokerage houses, and asset management firms that run this nation's financial services industry are, by and large, very stodgy and conservative. They manage billions of dollars for some very rich clients, and the primary goal of the majority of these clients isn't to become rich, as they already are wealthy, but to stay rich. Any good business will always try to do its best to give its customers what they want, and most of the largest customers of these firms seem to prefer security rather than growth. Thus analysts and fund managers are trained to keep this in mind when making their investment-related decisions.
Go read some interviews of prominent Wall Street tech analysts and fund managers in which they're asked what their favorite long-term investments are. Not what their flavor of the moment is, but rather which companies they'd really recommend holding for years at a time. Nine times out of ten, you'll see that these have responded by naming blue-chip techs such as Microsoft, Intel, Cisco, Oracle, and Sun. On the other hand, when a survey was recently done on major tech companies these individuals feel that people should stay away from if investing for the long run, high-growth firms such as Yahoo!, JDS Uniphase, and Qualcomm were near the top of the list. Sure, the latter of the two types of companies can have the potential to offer much higher returns for their investors over the long run, but most of their clients don't seem to care much about this, so neither do they.
As a result, while analysts and fund managers are more than willing to recommend and buy into volatile high-flyers from time to time, they'll only do so as long as they catch nothing but good vibes on a given company from all sides. They'll only do so as long as the stock's taking out old highs every other week, as long as earnings estimates are getting shattered every quarter, as long as new product announcements, smart acquisitions, and major contracts are the rule rather the exception for each and every month, and as long as half of all the pundits in Forbes and talking heads on CNBC are singing the company's praises. If these guys see something that makes them think that the given company might not be an unblemished work of art, they'll flee from it the same way elephant flee from mice. Not even, actually. I think an elephant would start running only if it saw a rodent come up before it, and wouldn't do so out of fear that one might come up on the horizon, although there's no way of knowing for sure. These guys tend not to have even have that level of courage.
Needless to say, the big bad elephants of Wall Street are ditching Qualcomm out of fear that, metaphorically speaking, a mouse is on the horizon; and it's nothing new for the company. Although those that have only recently found about Qualcomm might not be aware of it, back in 1997-1998, while its high-tech brethren soared to the heavens, the company's stock was highly earthbound. This in spite of the fact that it was posting some phenomenal growth. Throughout those years, its P/E kept dropping, and at one point almost reached a ridiculous 20. Why, you might ask? Because all the pundits were worried that the third-generation wireless standard wouldn't involve CDMA, leading the technology to die a slow death. These people pointed to the fact that Ericsson didn't support CDMA at all, and was actually in a heated patent dispute with Qualcomm, and that Nokia's support was anemic at best.
The Qualcomm die-hards, both over here and at SI, knew better. They saw that although the majority of the world had chosen GSM, CDMA was far superior to GSM in regards wireless data communications, and thus the rest of the world, Ericsson included, would forget about the fact that networks built on the former weren't compatible with the latter, and would adopt CDMA for 3G anyway. I doubt that this fact was lost on most of the power brokers who decided to shun Qualcomm. After all, there are some smart people working on the Street (some" is an important word here). However, these people, given the caution that they practice at all costs, decided that the huge potential return they could attain on their investment simply wasn't worth the risk involved.
Then came the Ericsson agreement, ending the lawsuit and paving the way for CDMA to be the protocol of choice for 3G. Soon the same people who wouldn't touch shares of Qualcomm with the proverbial ten-foot pole couldn't get enough of the stock. By the time that the buying frenzy in the company had reached its zenith, claims such as Walter Pieczyk's "3 billion people each with 2 CDMA devices in 2010" (as optimistic as I am about the company's prospects, I have to admit that prediction was quite absurd) were the norm. Of course, even if they got in soon after the deal with Ericsson had been made, none of these people profited as much from the stock's manic appreciation as those who invested beforehand as a result of having the foresight to forget about near-term squabbles, and rather focus on the long-term need for CDMA in leading-edge wireless data solutions.
Now we're right back where we were in '97 and '98, not in terms of the price Qualcomm's trading at (we haven't fallen that far :-) ), but in terms of the way the street's viewing the company, and the uncertainty that's making these investors ditch shares of Qualcomm en masse; and let me tell you, it has almost nothing to do with the repeal of Korean handset subsidies, and it only indirectly has to deal with China Unicom's decision to stay with GSM for now. These two things are just excuses to sell. Think about it: if the street really believed that when 3G takes over the wireless world in a few years, that Qualcomm would be getting significant royalties on all 3G handsets, and that its chips would be in the majority of these handsets, do you really think that it would kill the stock the way it has over issues such as handset subsidies and Chinese rollout postponements? Of course not, which is why the true source of the fear and panic on the Street in regards to Qualcomm stems from a far more critical issue. So what is this issue? Well, it can be summarized in one little acronym: W-CDMA.
As I'm sure many of you already know, the specifications for W-CDMA weren't developed by Qualcomm, but by its good friends (sarcasm, of course) Ericsson, Nokia, and Japanese wireless carrier NTT DoCoMo. These companies have done their best to use their extensive clout to make W-CDMA have a lot of GSM-like attributes, and to make it the 3G protocol of choice for the majority of the world's wireless networks; and as much as I hate to say it, as long as these networks end up rolling out on schedule, it looks like they're going to succeed. So now we have this renegade variant of CDMA set to be the dominant 3G standard, a variant whose specifications weren't developed by Qualcomm but by companies that it's often been at odds with, which means that it might be more difficult for the company to extend its CDMA ASIC dominance (Qualcomm makes 90% of all CDMA ASICs sold); and to top it all off, Ericsson and Nokia still haven't signed official W-CDMA patent licensing agreements with Qualcomm, with both companies claiming that there are significant amounts of their own intellectual property embedded into the standard. So analysts and fund managers, in all too typical fashion, are now doing their best to stay away from Qualcomm in the same manner that they once did; but given the seemingly bleak circumstances, you don't expect me to blame them from doing so, right?
Well, let's separate fact from fiction here. Just as it would've been a smart move for Qualcomm investors to cut through the hype generated by comments such as the one Pieczyk made during the stock's heyday, it's important to take a cold, rational look at W-CDMA and what it implied for Qualcomm's long-term potential.
First of all, while Ericsson and Nokia will undoubtedly get some royalties for W-CDMA, by all accounts, it's virtually impossible for anyone, no matter how hard they might try, to create a working commercial version of CDMA without infringing on Qualcomm's patents. Furthermore, George Gilder's stated that NEC engineers aiding in DoCoMo's W-CDMA rollout have confirmed to him that W-CDMA does involve the use of a large amount of Qualcomm's intellectual property. So the company will most likely be getting royalties on W-CDMA handset, chipset, and base station sales.
Now to handle the question of whether Qualcomm will be able to extend its CDMA ASIC expertise into the W-CDMA market. The concern here stems from the fact that much of the underlying protocol for W-CDMA is based on GSM, a technology that Qualcomm has little expertise with. However, by the same token, it should be noted that for a company that's experienced at working with CDMA to pick up on GSM than vice versa. For example, consider how much trouble Nokia's engineers, who have proven extremely adept at creating GSM ASICs for use in their handsets, have had in regards to creating competitive CDMA chipsets. On the other hand, by means of their ability to single-handedly create HDR, a time-division (i.e. similar to GSM) cellular technology, Qualcomm's demonstrated quite well its ability to learn new tricks. Combine that with the fact that in spite of possessing some GSM-like attributes, W-CDMA is still, as the name implies, a CDMA variant, and you can see that although Qualcomm may face some major challenges in the W-CDMA ASIC arena, it still has to be considered the odds-on favorite to dominate this market, just as one had to consider CDMA the odds-on favorite to become the preferred worldwide standard for 3G back when Qualcomm was still duking it out with Ericsson in the courts.
As I've tried to show, all of the pessimism currently being showered upon Qualcomm is nothing more than history repeating itself, with Wall Street's finest once again doing their best to add fuel to the fire of needless uncertainty regarding the company's potential. It all reminds me of a third-rate TV series where, in every episode, the protagonist ends up facing off against the same antagonists as before, and the same dilemmas as before, with only the context being different. It sure never looks good for the protagonist during the middle of the episode, and he always ends up hearing a chorus of concerned people telling him that it'll be impossible for him to succeed, all in a sad attempt to make the viewers of the show think that this time, the good guy really won't end up winning; but in the end, the only ones who end up duped are the ones who end up buying into that repetitive, predictable commentary.
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