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Qualcomm Stock May Need Reality Check

Analysis: The wireless technology firm's shares, which recently soared to $406, have fallen more than $35 this week. But some say the drop merely reflects profit-taking.


Has the bubble burst on Qualcomm Inc.'s meteoric stock?

Conventional wisdom says yes, given the wireless firm's torrid rise to $406.13 recently--in the manner of runaway Internet issues--and the subsequent three-day drop of more than $35 so far this week.

After all, this is a stock that traded at just $27.72 at the start of 1999--and with today's close of $342.88 (down $20.38 in heavy Nasdaq trading), the shares have still jumped more than 1,000% for the year. The San Diego-based company's market cap is $56 billion. It has vaulted into the Fortune 500, landing at No. 440.

Surely Qualcomm is showing the telltale signs of a stock that is coming back to Earth after being pushed too high by over-excited investors.

Dave Powers of Edward Jones thinks so, and on Monday morning he cut his Qualcomm rating from a "buy" to a "hold."

"We think they're extremely well-positioned for the future, but at $380, we felt that the stock had gotten ahead of the underlying fundamentals of the company," said Powers, a senior technology analyst.

So far, however, few analysts have followed suit. In fact, many who follow Qualcomm are chalking up the recent retrenchment to profit-taking and have rejected the notion that the company's shares have hit their peak.

"If you compare it to many other tech stocks, it's not outrageous," said Greg Geiling of J.P. Morgan Securities, who recently raised his target price for Qualcomm to $460 a share, up from $315. "I honestly don't think we're pushing the valuation envelope too far here. Fundamentally, this is a very sound story."

Bruce Sherman admits to doing a bit of selling after the big run-up. But Qualcomm stock remains the largest single investment by his company, Private Capital Management, a Naples, Fla.-based investment firm with $4 billion in assets.

"We wouldn't be still in it if we didn't like the valuation," said Sherman, whose firm held more than 5% of Qualcomm's stock earlier this year. "It's not a bubble. I don't invest in bubbles."

In San Diego, when people talk bubbles, they are probably talking champagne.

The stock held by Qualcomm Chairman and Chief Executive Irwin Jacobs is worth more than $2 billion, based on holdings reported this month. As a group, the company's 21 officers and directors hold stock worth more than $5 billion.

Qualcomm also has an aggressive stock option plan, and thus thousands of company employees are getting rich too. And as Qualcomm has grown into a major corporate citizen, more and more San Diegans have invested in the firm's stock--no doubt spreading the wealth far beyond the company's campus.

Not bad for a company that traded for years between $20 and $30 and was a favorite playground for short-sellers.

Qualcomm holds key patents to code-division multiple-access, or CDMA, a complicated wireless technology developed by the military and adapted by the 14-year-old company for commercial use.

Mobile phone systems using CDMA are expanding quickly in the United States and elsewhere, despite a years-long head start by a rival technology developed in Europe. Many wireless carriers worldwide are expected to convert to CDMA-based systems in the years ahead to accommodate the expected demand for fast, wireless access to the Internet and other data.

Those facts have been known for some time. But recent events--such as the company's latest financial report, its plans for a four-for-one stock split--have prompted further upward jolts to Qualcomm's stock.

Qualcomm shed its money-losing network infrastructure equipment business in a deal last year with Ericsson of Sweden, and it will soon sell its unprofitable mobile phone manufacturing business. Going forward, the company plans to focus on selling specialty CDMA chipsets for mobile phones and other wireless devices--and, of course, on collecting a steady stream of CDMA royalty income.

Analysts foresee earnings of $3.79 a share for fiscal 2000 and $4.70 for the following year, according to consensus figures from earnings tracking firm Zacks. Those on the upper end, such as Geiling at J.P. Morgan, are predicting earnings of $4.05 and $5.75, respectively, for 2000 and 2001.

Using those numbers, Qualcomm's stock close Wednesday is 73 to 90 times expected earnings for fiscal 2000, depending on the estimate.

Analysts concede that some portion of the stock's recent jump almost certainly stems from discouraged short-sellers trying to stem their losses. Those investors take the position that Qualcomm's stock will fall and sell borrowed shares at the current price with the expectation of replacing them at a lower price later--thus pocketing the difference.

When the stock rises instead of falls, the investors typically scurry to buy back shares before the price escalates further--a situation called a "short squeeze."

But there are other factors too.

"The wireless and telecommunications industries are finally starting to see their rightful place on Wall Street," said Ray Jodoin, a wireless analyst at Cahners In-Stat Group, a research firm based in Newton, Mass. "Suddenly investors have realized that wireless is the Internet."


King of the Wireless World?

Shares of San Diego-based wireless technology firm Qualcomm have been among the stock market's biggest stars this year as investors bet on spectacular earnings growth in the years ahead. The stock this week began to pull back, but many analysts remain bullish. Source: Bloomberg News

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