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Marcial: Strong Signals for Qualcomm

The rally in the stock looks to continue with the rollout of new devices that use the company's wireless communications technology

Tech stocks haven't exactly been stellar performers of late, but shares of Qualcomm (QCOM) have been on fire in spite of the distempered, volatile stock market. Vaulting higher since mid-March, when it traded at around $38 a share, Qualcomm's stock had sprinted to $50 by June 19, before easing to $48 the next day. But don't think the party is over.

I am not one who would advise chasing stocks that are spiraling up fast. But Qualcomm, the largest developer and maker of digital wireless chipsets based on the CDMA (Code Division Multiple Access) technology, presents an uncommon opportunity.

Some positive developments for Qualcomm have stirred several pros who follow the stock. One of the more immediate potential upside catalysts they see is the advent of the next-generation 3G phones that both Apple (AAPL) and Research In Motion (RIMM) are launching.

More Smartphones Help Qualcomm Profits

"We view the aggressive ramp-up of 3G phones by Apple and Research In Motion a net positive for Qualcomm," says Mark McKechnie of American Technology Research, who rates the stock a "buy" with a 12-month price target of $60 a share. Apple and RIMM will pay Qualcomm royalties on patents for the use of CDMA-based technology in the 3G phones, says McKechnie. The royalty amounts to about 4% of the price of the phone, he notes. The increasing buildup in the 3G wireless smartphone market is bolstering Qualcomm's bottom line, adds McKechnie.

Qualcomm's products include CDMA-based integrated circuits and software for wireless voice and data communications, plus global positioning systems (GPS). Part of the company's income comes from one-time licensing fees and ongoing royalties on many of its more than 5,700 patents and intellectual property. Major makers of wireless equipment that use CDMA technology and associated protocols include Samsung, Motorola (MOT), LG Electronics, Research In Motion, Kyocera (KYO), and Nokia (NOK), which currently is involved in a patent litigation with Qualcomm.

Qualcomm's chips are also used in phones that deliver video broadcasts. Another Qualcomm handset platform is called BREW, which is used to drive wireless data applications.

Waiting for a Court Ruling

To McKechnie, Qualcomm's stock has two main drivers: strong business fundamentals, and the legal battle with Nokia, which is now pending in a Delaware court. "Qualcomm's fundamentals alone are supporting the stock's current valuation," he says. The company is earning more than $2 a share, he says, without receiving royalties from Nokia, the No. 1 handset device maker, because of the current litigation. But McKechnie predicts a settlement should come over the next three to 18 months, with Nokia ultimately paying at least 2% royalties to Qualcomm.

Reflecting the improving fundamentals, Qualcomm raised its estimates for the fiscal third quarter and for all of fiscal 2008 despite the weak global economic backdrop. "The company's fundamentals remain compelling as massive growth in the high-end 3G wireless smartphone market for both CDMA and WCDMA technology is producing healthy product sales, together with robust average selling price [for wireless devices]," says David Weissman at Zacks Investment Research, who also rates the stock a "buy" and recently raised his six-month price target from $49.99 to $55 a share.

Here are some key contributors to Qualcomm's positive outlook, according to Weissman: (1) Demand for its mobile chipsets for the CDMA and WCDMA 3G-based wireless technologies is likely to accelerate beyond 2008 and should bring in new revenue sources; (2) Its media and mobile video initiatives are expected to gain momentum as Verizon Communications (VZ) deploys live television content via handsets, using Qualcommn's MediaFlo technology. AT&T (T) also announced similar offerings to its customers using Qualcomm technology, and Qualcomm has such projects being tested in Taiwan and China.

No Outstanding Debt on Its Balance Sheet

Qualcomm has also entered into multiyear licensing pacts with the major U.S. broadcasting companies, including Fox Television Group (NWS), NBC Universal (GE), CBS (CBS), and MTV (VIA), under which they will use the company's MediaFlo mobile entertainment platform to provide video content.

Financially, Qualcomm is sitting pretty, with a strong balance sheet, supported by more than $11.5 billion of cash and marketable securities, and no outstanding debt. "The company continues generating positive free cash flow," notes Weissman.

The stock isn't cheap, as it is trading at a premium when compared to its peers—22.3 times estimated calendar 2008 earnings of $2.18 a share. The peer group's average price-earnings ratio is 21. For calendar 2009, American Technology's McKechnie forecasts earnings of $2.50 a share. He feels the premium p-e is justified as he notes that Qualcomm's near-term business appears intact, in part due to strong demand for cellular phones and new 3G wireless rollouts. Much of Europe uses other wireless technology standards, mainly GSM and other competing wireless protocols. But Qualcomm bulls are confident that the use of CDMA-based networks will continue to expand worldwide.

One of them is Vindu Benjamin of First Global U.S. Research, who rates Qualcomm "moderate outperform." He says that in view of the "rapid growth in the number of 3G CDMA-based networks and subscribers worldwide, we believe the growth of Qualcomm's CDMA-based devices will be driven by increased shipments to various regions around the world, particularly the emerging countries, such as India and China, followed by the U.S., Europe, and North America."

So far Qualcomm has been a good call for the bulls. And its prospects should remain bright as Qualcomm's digital wireless technology finds its way into more markets worldwide.

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