Qualcomm Gets Expensive (QCOM)

Includes: QCOM, TXN
by: Douglas McIntyre

It is extremely hard to say anything negative about Qualcomm (NASD:QCOM), except that it competes with Texas Instruments (NYSE:TXN).

Qualcomm, which develops and supplies CDMA-based integrated circuits and intellectual property, has almost tripled in price since mid-2002. This year the stock has gone from a low of $32.98 to a high of $51.03. The stock now trades at $48.63, giving the company a market capitalization of over $81.5 billion. In the last full fiscal year, ending September 25. 2005, revenue was $5.673 million, up from $4.880 billion in the prior fiscal.

The company recently raised guidance for fiscal Q3 which ends in June. Qualcomm said that revenue would be at or above the high end of its $1.77 billion to $1.87 billion projection. The company said it believes it will ship 53 to 56 million of its Mobile Station Modem chips in the quarter, up from 36 million in the same quarter a year ago when the company had revenue of $1.358 billion.

When the company announced its second fiscal quarter ending March 26, 2006, revenue grew 34% from the previous year to $1.83 billion. However, the rise in operating income was much less impressive, from $572 million to $660 million. Diluted EPS only went from $.31 to $.34.

Shortly after reporting earnings, Qualcomm announced that its license with Nokia (NYSE:NOK), which expires in part on April 7, 200, has still not been renewed. But the market appeared to take it as at least somewhat positive that the two companies were still in negotiations. Also, within a few days of earnings, Reuters reported that Qualcomm and other 3G wireless providers were warning China against setting up its own standard for the wireless format. A home-grown 3G standard in China could obviously undermine the sales of Qualcomm products in that market and could also raise potential intellectual property issues.

The struggle for market share in the 3G chip market is going to be brutal. The sales of hundreds of millions of chips are at stake. The CEO of Texas Instruments recently acknowledged in a CNNMoney interview that TI would compete with Qualcomm for this business. Because the two companies have used different formats, GSM and CDMA, the rivalry has not been as heated as it might be. But, with competition in 3G, these distinctions will no longer be as important. As CNNMoney pointed out "because of these different standards, Qualcomm and TI have not competed head-to-head on the same type of chips. But that will change with the advent of 3G wireless networks".

Wall Street does not debate that Qualcomm will be an important part of the 3G future, but there are small doubts emerging about how large its piece of the pie will be. Issues in China, and the sabre rattling at TI, may not do much to halt the rise of Qualcomm's shares. But, with a market cap to sales ratio of over 12.6 compared to TI's at 3.7, it will not take much to push the Qualcomm share price down.

QCOM 1-yr chart:

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.