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QualComm: Epilogue

Posted on Wednesday, Nov 7th 2007

By Vijay Nagarajan, Guest Author

“The technology we are enabling continues to have a growing and positive impact on people’s lives around the world.” – QualComm 2006 Annual Report

This vision, which I share with the San Diego giant, has been its differentiator, the path to its engineering leadership. In this series so far, I reviewed revenue forecasts, pitfalls, forward-looking events and its valuation. As I have mentioned earlier, the $45 valuation is strong and can only go up.

The negative events surrounding the company are a ramification of its aggressive defense and the geo-political alignment of the industry. It is unrealistic to expect that one company will win or lose all cases and so the reasonable worst case that I have taken puts my lowest valuation at $36. In order to build on some of its positive steps and look ahead of the next five years (as CDMA-based systems will start to ramp down), there are two things it will continue to do –

  • Engineering leadership: The company continues to move towards converging multiple wireless technologies into a single chipset, much ahead of others. The Snapdragon platform and the Gobi announcments are good examples. Armed with Bluetooth assets from RFMD, WLAN from its Airgo acquisition and GPS capabilities from Snaptrack, it is more prepared than ever before to capture most of the silicon in the phone platform.
  • OFDMA patents and products: QualComm and Ericsson are actively pursuing LTE. Then there is its proprietary UMB. Most importantly, not many people are aware that QualComm, this summer, silently purchased the mobile WiMax assets of TeleCIS. It is perhaps the only company that can deliver quality 4G products in any technology that wins tomorrow. So, now you know where the R&D budgets have been going. These OFDM initiatives, have given it a reasonable patent position lest the other vendors return its favor by demanding high royalties for the 4G products. For more details, I will refer you to this article in my blog.

There are other things that I see QCOM driving-

  • It needs a concerted vision to grow its chipset market share. Even with the best products, relationship matters. So far, it has been the age of CDMA and the “pay or get bust” attitude has paid off fairly well. But moving forward, with a flatter IP structure, OFDMA will thrive on heavy cross-licensing between the major players. There will be more Asian giants like Samsung and NEC in the field and there is a possibility of outsiders suing for royalty. So, it cannot survive long-term by estranging itself from the other movers-and-shakers who seem to have formed an uncomfortable yet formidable alliance to combat the San-Diego giant. This is why I have often brought up the point of whether the company should negotiate lower royalties for more market share.
  • This vision has to be accompanied by a more softened stance in the part of the management. This is not to undermine the current management. But its policies should not give the industry a negative perception that can potentially suppress the benefits of its engineering dominance.
  • With the future inherently moving towards low cost, low margin OFDM systems, we may see lesser R&D spending after 4-5 years. It is not an easy thing to digest but as I have mentioned elsewhere, not necessarily a bad thing also. It has done its homework fairly well having invested substantially in the future already.
  • Most importantly, as Gobi symbolizes, QCOM will increase its footprint in other non-traditional sectors. Do not be surprised if QualComm announces a wide-entry into the PC business. For example, it can use its bluetooth and WLAN products. Also, the possibility of doing combination data-cards and modules(WiMax/WiFi, HSDPA/WiFi etc.) is real and lucrative. There will be a high barrier to entry, but the upside is huge.

In summary, we will see QualComm shedding the “CDMA COMPANY” tag to attempt a more global, wider acceptance.

This segment is a part in the series : QualComm

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Vijay,

In response to your question whether Qualcomm is a stock to short, my guess is, Qualcomm will have to deal with some bad news yet wrt the law suits and royalty reductions. Those events, as and when they occur, would likely crash the stock to the low thirties.

Over time, the stock will, most likely, return to the levels you are positing, so it may be also a good strategy to look for buying opportunities during those crash times, if you believe that the future of Qualcomm is positive, as you suggest in these last 2 pieces.

Makes sense?

Sramana

Sramana Mitra Thursday, November 8, 2007 at 11:27 AM PT

Ms.Mitra,

That does make a lot of sense. In fact, that is what happened after the last quarter conference call. The shares went down to $36.60, almost a three-year low. At this valuation, as I have argued, it only seems that the market has absorbed the legal risks while not accounting for the company’s increasing footprint.

But as you said, despite this, it is likely that when a bad news on the Nokia deal pops up, the shares will plummet yet again. From the tone of the executives during the call, it almost appeared that they are bracing for it, or at least preparing the market, if and when it happens.

Vijay

Vijay Thursday, November 15, 2007 at 6:46 PM PT

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