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 2 Next Page

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