November 12, 1999 2:00 PM PST

A focused Qualcomm rocks Wall Street

Investors fixated on the quick gains that can be racked up on Internet stocks missed one of the year's more spectacular runs.

Shares in San Diego, California-based cellular phone company Qualcomm--not e-Qualcomm, i-Qualcomm or Qualcomm.com--have surged more than 1,200 percent in the past year and show no signs of slowing down. In trading today shares jumped 32.5 points to 378, and one analyst is saying they could reach 450 in the next year.

Oddly enough, the stock surge coincides with the company's decision to shrink by shedding units that delivered revenues but were in markets where margins are getting squeezed. And, yes, there is a link to the Internet.

"The story with Qualcomm continues to get better every day," said David Powers, an analyst with financial services company Edward Jones. "The two fastest growing industries are the Internet and wireless, and Qualcomm is in the middle of this wireless Internet tornado."

Qualcomm stock chart Although Qualcomm will lose a significant portion of its revenue by selling some divisions, investors are salivating at the company's high-speed wireless technology and how it dovetails with the explosion in handheld Internet-capable devices.

"Royalties are almost pure profit and the semiconductor business has high profit margins," Powers said. "When you combine the two, which is mostly what you'll have when they sell the handset business, you have a highly profitable organization."

Qualcomm sold a unit that makes cellular equipment to competitor Ericsson earlier this year and it plans to sell its handset unit next month. Qualcomm cited shrinking profits in both divisions as reasons for the sales.

"Getting out of the old line manufacturing business is the way to go," said Mark Cavallone, an analyst with Standard and Poor's. "Certainly the stock movement this year shows the strong market acceptance of that move."

The company now says it can focus on making chips for cellular phones, as well as continue to develop new cellular technologies, such as High Data Rate (HDR). HDR technology can transmit data at rates of 2.4 megabits per second, which is several times faster than current wireless technology and on par with high-speed connections such as digital subscriber line (DSL) and cable modems. Qualcomm expects the technology to to be used in devices such as cellular phones, handheld computers, and wireless modems for laptops.

"What they are doing is getting to a purely intellectual-property based company," said Philip Redman, program manager of the Yankee Group's wireless practice. "That means high margins and low costs."

In the fourth quarter, Qualcomm posted net income of $136 million, or 73 cents a share, on sales of $1.1 billion. A year ago the company reported fourth quarter profits of $40 million, or 27 cents per share, on revenue of $926 million.

During the 1999 fiscal year the company collected about 29 percent of its revenue from its chipset and software business and about 11 percent from fees and royalties generated by its 75 licensees. The company sold most of its infrastructure business in May, which accounted for about 24 percent of revenue, and plans to sell its handset manufacturing business in December, which accounted for about 37 percent of annual sales.

"I've got to believe handsets are going to become a commodity item, if they aren't already," said Alan Mosher, a wireless industry analyst at Probe Research. "[Qualcomm has] really become focused on providing the path for carriers to start doing data at higher rates."

Qualcomm developed its wireless technology, called code division multiple access (CDMA) , ten years ago. Back then, the company focused on all aspects of the cellular business--from chips to handsets--to boost acceptance of the technology. Now that the protocol has caught on worldwide, Qualcomm can shed its hardware concerns to focus on the wireless technology.

"We originally entered those businesses to ensure the adoption of CDMA worldwide, to make sure there were the devices to support it," said Qualcomm spokeswoman Christine Trimble. "But if you look at the companies that are successful in the infrastructure [and handset] business, they are very large. It was difficult to compete at that level."

The company announced in September that demand for CDMA-based phones grew 171 percent during a 12-month span, in large part based on its ability to deliver wireless data services. Almost 35 million subscribers use CDMA phones worldwide.

Clearly, buying Qualcomm a year ago when the stock was in the 20s was like having a license to print money. Now that it is near 400, investors may be wondering if there is much upside left.

"Long term, the future is very bright for Qualcomm but the recent run-up is not sustainable. They're getting very close to the point where the stock price is ahead of the underlying fundamentals," said Powers of Edward Jones, who has a "buy" rating on the stock.

"I would expect some near term pullback, given how well it has done in the last few weeks," echoed Cavallone of Standard and Poor's.

"If investors expect [the same performance] next year, I think they are sadly mistaken," Cavallone added. "But I think the company does have the potential to move up more. There are things it could do that would excite investors even more, if that's possible."

News.com's Scott Ard and John Borland contributed to this report.

 

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