Standard-Bearer for a Wireless World
Shares of wireless-technology developer Qualcomm Inc. skyrocketed 16% on Wednesday after the company announced strong fiscal fourth-quarter profit and proposed a 4-for-1 stock split.
The rally was an exclamation point to a year that’s seen San Diego-based Qualcomm’s fortunes and stock price leap so high that the company’s dominance of its market is starting to be compared, by some at least, to those of Microsoft Corp. and Intel Corp.
But not so fast, some analysts have countered. Qualcomm’s stock price has now “gotten well ahead of itself” because the company will soon encounter stiffer competition in one of its key markets--making chipsets for its wireless technology, which promises to be the backbone of its future, said analyst Ed Snyder of investment bank Hambrecht & Quist in San Francisco.
The stock’s rally this year has been a key factor behind the surge in the Nasdaq composite index. Qualcomm’s spurt Wednesday--gaining $35.69 to a record $260.50--helped the index climb 46.88 points to 3,028.51, the first time that measure has closed above 3,000.
Qualcomm, which posted revenue of $3.9 billion for its fiscal year ended Sept. 26, provides a technology that most experts expect to be the future standard for digital phones and other wireless devices capable of sending voice, Internet data, electronic mail and video at much faster speeds than current networks allow.
The formula is called code-division multiple access, or CDMA, a government invention that Qualcomm developed for commercial use. Today it still competes with other wireless technologies in U.S. and overseas markets, but many analysts expect CDMA to steadily become the technology of choice worldwide.
Fueled by those expectations, Qualcomm’s stock has risen more than tenfold just this year, swelling the company’s market value by an astonishing $37 billion.
But Qualcomm and its stock had been underachievers for years as the company’s founder and chief executive, Irwin M. Jacobs, kept pushing to get the technology accepted.
The effort finally paid off in March, when Qualcomm and rival wireless-phone maker Ericsson of Sweden settled a long-running patent dispute over their technologies. That in effect cleared the way for Qualcomm’s offering to become the likely standard for the next generation of wireless communications.
And Qualcomm not only makes the chipsets and related components that go into CDMA products, it also holds nearly 200 patents on its technology, so it receives licensing and royalty fees from any company that uses its design.
“Owning the rights to CDMA would have been like holding the patents on the internal combustion engine in the 1920s,” said analyst David Heger of A.G. Edwards & Sons Inc. in St. Louis. “Everyone who bought a car would have paid a royalty on the engine in that car.”
Indeed, Qualcomm announced late Tuesday that its fiscal fourth-quarter operating profit more than quadrupled from a year earlier to $170 million on a 14% revenue gain to $1.1 billion--in part because its CDMA royalties more than doubled to $113 million in the latest quarter.
For the full fiscal year, Qualcomm reported a profit of $420 million, excluding one-time charges, on an 18% gain in revenue to $3.94 billion.
Those royalties and fees currently account for only 11% of Qualcomm’s revenue, but they’re going to grow in tandem with CDMA use. Besides, “almost all of that income drops right down to the bottom line” because CDMA’s development costs already have been paid by Qualcomm, Heger noted.
Qualcomm also has been a leading manufacturer of wireless phones. But facing minimal profits, and fierce competition from the likes of Ericsson, Nokia and Motorola, Qualcomm said in September that it plans to shed that business by the end of this year.
That move also will help the CDMA royalties stream become a bigger portion of Qualcomm’s overall earnings.
But Snyder of Hambrecht & Quist said that even though the market for CDMA chipsets and other products is growing, “Qualcomm is going to lose market share going forward” because Motorola and Intel are quickly moving into that market where Qualcomm had negligible competition during the last three years.
Qualcomm would still collect patent royalties from rivals, and “the CDMA market may be growing quickly, but the [manufacturing] capacity coming on line will outstrip demand,” he said. That will make it harder for Qualcomm to keep showing strong growth in the chipset-manufacturing segment, he added.
Another threat: The three big wireless phone makers--Nokia, Ericsson and Motorola--could make their own CDMA chips for their phones and stop buying from outside vendors like Qualcomm, said analyst Pete Peterson of investment firm Volpe, Brown Whelan & Co. in San Francisco.
But Qualcomm should be able to offset that problem by supplying CDMA chips for the raft of other wireless devices--palm-sized computers, video game players and so forth--that are either on the market or will soon be developed, he said.
“Remember, wireless is being pulled into a whole slew of new applications,” he said.
