Once Highflying Qualcomm Stock Declines Again on Latest Bad News
Qualcomm shares, which have lost nearly 70% of their value this year, sank another 8% Friday after three major providers of wireless phone service in South Korea said they would deploy technology developed by Qualcomm rivals.
The San Diego-based telecommunications firm saw its stock drop as low as $56.06 in Nasdaq trading before closing at $56.63, down $5.06.
The large wireless carriers, SK Telecom, Korea Telecom and LG Telecom, said they are planning to use a new generation of mobile-phone technology from Nokia, Ericsson and NTT DoCoMo, rather than Qualcomm.
Although South Korea is Qualcomm’s biggest market, analysts said investors overreacted to the news because the rival systems are based on Qualcomm’s code division multiple access, or CDMA, technology and will result in substantial royalties for the firm.
“For any variety of CDMA that’s chosen, Qualcomm will benefit,” said Mark Lowenstein, global wireless analyst for the Yankee Group in Boston. “The future of CDMA technology in general is looking even stronger.”
Friday’s announcement was just the latest in a series of recent setbacks for Qualcomm. Concerns arose in February that the company’s Chinese partner, China Unicom, would delay its planned roll-out of Qualcomm-based phone systems in Asia’s largest potential market. China Unicom, China’s No. 2 telecom firm, confirmed in late May it would not adopt CDMA.
Another blow followed in June, when South Korea ended its so-called handset subsidies, effectively doubling the price of mobile phones there. As a result, Qualcomm warned that sales of its chips could decline in the fiscal fourth quarter due to reduced demand for phones.
And last week, Ericsson President Kurt Hellstroem prompted another stock sell-off when he said high prices for wireless Internet and video applications would mean slower growth for the mobile phone industry.
Yet despite the litany of bad news, the company enjoys a formidable market position. More than 60 million mobile phones used around the world--roughly one in five--use Qualcomm’s technology, which will form the core for a new global standard that will enable mobile phones to more effectively process e-mail and surf the Web, as well as receive CD-quality audio and video in addition to handling voice calls.
Qualcomm is pushing its preferred version of the so-called third-generation, or 3G, technology. Nokia, Ericsson and NTT DoCoMo are working on another flavor of 3G, favored by the Korean firms.
But Qualcomm spokeswoman Christine Trimble expressed doubt that the South Korean companies had firmly shut the door on its 3G standard. SK Telecom and Korea Telecom have also announced plans to deploy Qualcomm’s 3G system by the end of the year, she said.
Qualcomm has licensed its CDMA patents to more than a dozen firms developing 3G technology, and the company collects royalties regardless of whether the patents are used for its preferred or rival systems. In its most recent fiscal quarter, Qualcomm took in $167.7 million in licensing fees, accounting for 26% of its overall revenue.
Qualcomm’s biggest source of revenue is selling microprocessor chipsets for wireless phones. Analysts estimate the company produces 90% of the chipsets used in CDMA phones. Qualcomm has announced plans to build chipsets and create software for the rival 3G system, and the company is likely to capture a strong market share, said James Reynolds, vice president of research for Ragen MacKenzie in Seattle.
“This is a major buying opportunity” for Qualcomm stock, Reynolds said after Friday’s decline.
Qualcomm began the year trading at $176.13 after rising 27-fold in 1999 and reached a 52-week high Jan. 3, when it closed at $179.31. Last year’s run-up has made the stock vulnerable to bad news, such as Friday’s announcement, analysts said.
South Korea is particularly influential because it was an early booster of Qualcomm technology. The country accounts for 30% of Qualcomm’s revenue and half of its earnings, according to analysts.
The industry is still in the early stages of deploying 3G technology, and many more contracts will be signed in coming months.
But any decision in favor of rival 3G variations could cut into the company’s long-term growth.
Investors also may have been spooked by statements from the South Korean telecom executives that they favor the Nokia-Ericsson-NTT DoCoMo system because they believe it will be adopted in China and Japan.
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Hanging Up?
Friday’s announcement by South Korea’s three leading providers of wireless phone service that they would use technology from Qualcomm’s rivals was only the latest in a series of setbacks for the San Diego company.
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Sources: Times research, Bloomberg News
