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Qualcomm
Qualcomm's Aggressive Investment Strategy

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By Lokicious
November 15, 2001

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What with the Pegaso default, Globalstar channel 11 news, and now a major new equity commitment to Vesper (in Brazil), I thought (even though we've already had some discussion of this) it worth trying to summarize Qualcomm's aggressive investment strategy in CDMA-related companies, of which the most risky involve carriers (Globalstar is really a carrier) that require huge capital expenditures before they can achieve profitability. Qualcomm's new accounting procedures, and explanations of them, have made it even more clear what the company is trying to accomplish, and the risks involved.

1) Qualcomm has provided, and continues to provide, loans and to buy equity in CDMA carriers (and to invest in other CDMA projects). Some of these loans and equity purchases are very big (hundred of millions of dollars), and almost all are high risk. We're talking about junk-bond type loans, and VC equity investing. As with all (calculated) high risk investing, the potential returns are also high, plus, in this case, the success of the companies in which Qualcomm invests also brings revenues to the core business (royalties, chips).

2) Being high risk, some of these investments are going to blow up in Qualcomm's face. Given the gossip-column mentality of Wall Street and its reporters, we can expect the failures to generate a lot of negative noise and the successes to be ignored.

3) We've discussed before what Qualcomm should do with its profits. Even in this down economy, Qualcomm continues to generate a lot of profit from its core business. It could repurchase its own equity; it could return some of it to shareholders in the form of dividends (and let us pay taxes). Instead, at least for now, it has chosen to put some of the money into the bank (or safe bonds) and the rest into high risk/potential high return investments.

4) As I've noted before, there isn't research (at least that I know of) about whether companies engaging in this kind of high risk investment do it as well as the VC investment firms. The disadvantage is a narrow focus on CDMA. The advantage in the narrow focus on CDMA, which Qualcomm understands and which it expects, overall, to be a success. However, research on VC investing shows, statistically, it provides vastly superior returns to more conservative investing. (If I buy 100 equally priced shares in 10 companies, if 9 fail and 1 gives me a 100x return, my average return is 10x.) Of course, statistical superiority does not mean superiority in each instance, which is why much VC investing (private placements in start-ups) is legally restricted to the very wealthy who can afford to lose, and one reason the very wealthy also, on the average, get better returns on their investments.

Anyone owning, or considering buying, shares in Qualcomm must understand that, both in its investments and in its core business, this is a company that swings for the fences. A lot of home runs correlate with a lot of strikeouts. If you aren't comfortable with that, you ought to find a team that tries to score with hit-and-run and well-placed bunts.