"Qualcomm was the ultimate example of people that were speculating in a marketplace that they didn't understand, and it bit them in the behind," says Bryan Prohm, a senior analyst at GartnerGroup Dataquest.
Prohm says Qualcomm (Nasdaq: QCOM) is still a potentially very profitable company with royalty revenue streams that will continue to grow, but he adds that those growth rates may not be as fast as speculated.
Investors will get a peak at those growth rates on Wednesday when the company reports its fiscal third quarter results. First Call is projecting a profit of 27 cents a share.
Qualcomm was a stock market sweetheart after PaineWebber analyst Walter Piecyk's 1999 report all but declared the company to be synonymous with Code Division Multiple Access (CDMA) wireless technology. His US$1,000 per share cap on Qualcomm stock sent the stock on a steep climb.
Piecyk's figures came from attributing future royalties to Qualcomm from CDMA-based chips. This was based on forecasts of 1 billion wireless handsets in use by 2003. Piecyk figured that about 80 percent of those handsets would contain Qualcomm intellectual property, netting Qualcomm a 4 percent royalty on each handset.
Investors followed the logic and bid up Qualcomm's stock big time. But even while that was happening, other market watchers questioned Piecyk's logic. For one, it is not guaranteed that Qualcomm will hold an 80 percent market share because there are different versions of CDMA, not all of which are based on Qualcomm intellectual property. In addition, the evolutiono third-generation wireless that's expected to drive CDMA use still has many uncertainties, and new technologies could be developed that would eat into Qualcomm's market projections.
So far, 2000 has been a tough year for Qualcomm on the market valuation front. Some analysts say that the stock market's, and Qualcomm's, slide was a much expected correction, but recent news has sent the company's stock prices dipping.
A big disappointment for Qualcomm came when a CDMA deployment deal with China service provider China Unicom fell through. The stock dropped from nearly US$160 per share in April to less than half that by in mid-June, when rumours of a possible takeover by Nokia started to surface. On June 27, the company warned that there could be low chip set sales in the fourth quarter because the South Korean government had eliminated subsidies, which was expected to result in a downturn of phone sales. The news sent Qualcomm's stock below the US$60 mark.
Still, Qualcomm's market cap remains close to US$50 billion, and not all the news has been bad. The company teamed up with satellite service provider Globalstar and In Flight Network to develop a system that allows for broadband Internet connections on airplanes. And some analysts predict that China and South Korea eventually will embrace CDMA. When that happens, Qualcomm will prove a major beneficiary.
"Qualcomm still holds the keys to the kingdom on CDMA, at least for the short term," Prohm says. But it's unlikely the stock price will reach the roller-coaster highs it enjoyed last year.
