From 3G to MediaFlo

05/12/2006 12:00 am EST

Focus:

When it comes to understanding wireless technology and stocks, Nikhil Hutheesing has no peers in the newsletter advisory arena. Here, back from the CTIA 2006 Wireless Show in Las Vegas, he discusses Qualcomm, which “every wireless portfolio should hold.”

“The CTIA show is a good barometer of how things are progressing in the wireless sector and I can tell you that this year, the crowd at the CTIA show seemed more enthusiastic about industry prospects than ever. Over 40,000 people wandered through more than 1,000 booths spread out over 400,000 square feet. But through all the fanfare came a clear message: This is a fast growing industry with great prospects ahead.

“Two years ago, the focus was on infrastructure companies that would benefit from the roll-out of high-speed third generation (3G) wireless networks. Last year, the spotlight was on new kinds of technologies that will help wireless carriers recoup their enormous investments in their next-generation networks. This year, it became clear that the cell phone has really come into its own as a powerful computing and entertainment device.

“In short, the cell phone is undergoing a rapid metamorphosis—from a portable telephone to our most important communication, productivity, and entertainment device. Soon we will all wonder how we ever survived without one. Wireless carriers are increasingly looking for ways to integrate their cellular service with traditional landline services and operators are also looking for ways to move beyond cellular networks to Wi-Fi networks. Mobile ads on cell phones were also a big topic.

“I spent a lot of time at the Qualcomm (QCOM NASDAQ) booth and met with CEO Paul Jacobs. The booth was huge and packed—not surprising given the critically important role that Qualcomm plays in the wireless industry. In case you are not familiar, Qualcomm licenses its code division multiple access (CDMA) technology to wireless carriers and cell phone manufacturers. The technology has become standard in the US and is used in many other countries as the core technology to distribute voice and data wirelessly.

“The company has become a money-making machine—especially as 3G networks are being deployed around the world. Qualcomm is also seeing increased business in its BREW operating system as carriers and handset manufacturers incorporate the technology. Qualcomm is also doing well in selling the chips that are used by manufacturers of cell phones. Qualcomm has been attempting to gain greater market share and it seems that the company is now having some success.

“In the fourth quarter of last year LG shipped its phone, the U880, in significant volumes. LG is apparently pleased enough with the results that it will be sending more designs Qualcomm's way this year. It seems that Samsung has a similar view. There was also some talk at the CTIA show that Qualcomm is working closely with the Chinese vendor Huawei to get phones to Vodafone later this year. And Qualcomm is well-positioned to win some share at Motorola for its 3G chips.

“Perhaps the biggest news from Qualcomm was its demonstration of the MediaFLO network—offering TV service over mobile phone networks. I've been writing about this for over a year now and it was good to finally see it work. The company had its MediaFLO network up and running in Las Vegas, as a number of vendors showed off new MediaFLO handheld devices. These included the Samsung clamshell device with the rotating screen which is likely to be one of the first FLO phones available commercially. There was also a MediaFLO RAZR, but there was no word on whether this would be available.

“Expect Verizon to launch FLO service later this year, which means phones should begin shipping late next quarter. An interesting feature of MediaFLO is that it can sideload data, which means that in addition to 20 live TV channels and 40 or so music channels, the service has set aside several low-bandwidth channels to provide other forms of data. The most interesting example was live stock quotes.

“Financially, Qualcomm continues to do very well. Qualcomm recently posted an 11% rise in quarterly earnings and raised its 2006 profit outlook. It also raised its guidance for the first quarter. For the fiscal year 2006, expect Qualcomm to generate $7.1 billion to $7.4 billion in revenue and $1.57 in earnings per share. The shares are not exactly cheap, with a p/e 38.6. But given the tremendous opportunities, its increasing presence in Asia, and MediaFLO, I expect shares to continue to rise. I have a target price of $60 in the next 12 months and I consider this company to be a wireless blue chip that every wireless portfolio should hold.”

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