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Tech darling Qualcomm stumbles

Like so many technology stocks, the unraveling of months of stock market hype for the wireless technology company is proving painful.

For Qualcomm, like so many technology stocks, the unraveling of months of stock market hype has proved painful.

The San Diego, Calif.-based wireless technology company has been among Wall Street's most-watched stocks in the past 18 months and is considered a bellwether for both the wireless industry and the Nasdaq Stock Market, which has roughly mirrored Qualcomm's recent roller-coaster ride.

"Qualcomm has got an excellent (public relations) machine. They've done a great job marketing their technology and touting their position in the market," said Iain Gillot, a wireless industry analyst at International Data Corp. "But the hype has gotten a little carried away."

A phenomenal run-up last year made Qualcomm shares a hot commodity, helping to fuel an interest in all things wireless. But fears about slowing chip sales, uncertain expansion into China, and the downturn in the broader markets have clipped Qualcomm's wings.

In response, the company is moving into a defensive mode. Executives say they are even pondering support of products that compete with the company's flagship

Qualcomm at a glance

HQ: San Diego, CA  
CEO: Irwin Mark Jacobs  
Pres.: Richard Sulpizio  
Employees: 9,700  
Annual sales: $3.9 billion  
Annual income: $201 million  
Date of IPO: June 1992  
Ticker: QCOM  
Exchange: Nasdaq

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Bloomberg (6/13/2000)
technology for the end of this year. The company plans to add the world's most popular wireless technology, GSM, or Global System for Mobile Communications, with its own standard on a new "dual mode" chip that would power cellular phones on most wireless networks worldwide.

Qualcomm plans an acquisition or strategic alliance by the end of the year to branch into this competing technology, according to executives.

Analysts believe Qualcomm is a solid company with a promising technology, but they say the company's valuation simply became disconnected from the firm's operational performance.

Nevertheless, Qualcomm has built a viable market from nothing just a decade ago. Its code division multiple access (CDMA) digital wireless transmission technology is being considered as a potential challenger to older, more established standards such as GSM, which is prevalent in Europe and Asia. CDMA's ascension comes as the wider technology industry has thrown its weight and marketing muscle behind the potential of wireless Internet technologies.

To prepare for the upcoming battles, Qualcomm has trimmed itself to its fighting weight by selling its antennae infrastructure business to Ericsson and its handset manufacturing unit to Kyocera. The company now generates revenue primarily by manufacturing and selling microprocessors to mobile phone makers and by collecting royalty payments from competing chipmakers that use Qualcomm's patented CDMA technology.

The strategy is akin to aspiring to be the "Intel Inside" of the wireless world. However, Qualcomm's global market share is still closer to that of Apple's Macintosh computer than to the Windows-Intel duopoly market share.

Recently, signs have emerged that suggest the growth of CDMA may slow, casting a shadow over a company some analysts predicted would reach a stock valuation of $250 per share.

Richard Sulpizio Executives say that little of significance has changed since the heady days of the company's stock run-up.

"The fundamentals haven't changed from when the stock was at $150 in February," said Qualcomm president Richard Sulpizio. "We do believe China will go CDMA. Will it be as aggressive as we hoped? Maybe not."

But executives and analysts believe Chinese carriers will eventually deploy wireless networks using both GSM and CDMA systems, making a hybrid dual-mode chip a valuable asset for a company such as Qualcomm.

According to Reuters, China Unicom, which earlier had said it would not use Qualcomm's current CDMA technology, this week said it would begin testing Qualcomm's third-generation CDMA technology next year.

"By the end of this calendar year you will have some clearer picture of our strategy for GSM-CDMA dual-mode chips," Sulpizio said. "We have no plans or desire to go into the GSM chipset market. But we think we can add GSM core functions to our CDMA technology."

Analysts do have some concerns about the company's success in Asia, however, a critical market for the CDMA technology.

Qualcomm recently touted a deal with eight Chinese phone manufacturers that agreed to support the technology. But analysts said this will do the company little good if its CDMA technology is not the standard in that nation.

Some analysts also have concerns about the Korean market--which accounts for nearly half the worldwide CDMA market--citing the government's requirement that wireless carriers there end subsidies for cellular phone handsets. Analysts fear Korean consumers will balk at the now more-expensive phones, curtailing the growth of CDMA and therefore Qualcomm's revenue. That could in turn lead the company to advise financial analysts that earnings could be lower than projected.

"Subscriber growth in Korea is going to flatten," said Snyder, who has a "market perform" rating on the stock. "When Korea flattens out, that's going to impact Qualcomm's earnings. They're going to have to guide down numbers."

Still other analysts maintain a more positive outlook for the company, despite the uncertain situations in Korea and China.

"The removal of phone subsidies in Korea is not likely to affect the current quarter and in the past has not had a lasting or dramatic impact on Qualcomm's (chip) business," PaineWebber equity analyst Walter Piecyk wrote in a research report two weeks ago, in which he reiterated his $250 price target for the stock.

"We believe China Unicom will proceed with plans to build a CDMA network in China because it will provide that company with a technology advantage over China Mobile Telecom in 2001," Piecyk added.

Ultimately, most analysts agree that tapping the Chinese market, a massive nation that is ripe for wireless adoption because of its increasing economic status and an outmoded telecommunications infrastructure, is critical for Qualcomm and the growth of CDMA.

"To me the future viability of CDMA, and whether Qualcomm is a niche or a true global player, is do they get China?" said IDC's Gillot, who believes the Chinese market represents the difference between CDMA reaching 10 percent or 30 percent of the world's population.

"Let's say China does not use CDMA. Then Qualcomm is left with 10 percent of the global market, and that to me is not a valid market," Gillot said.

Analysts believe Qualcomm's move toward GSM chips is critical for the company's future. That would broaden the company's market, even if it did serve as an admission that CDMA is unlikely to gain total worldwide adoption.

Qualcomm executives say they're still on track, however.

"We're in the right business. We have the right technology. It's all in our hands to perform," Sulpizio said.