Qualcomm Has a Winning Strategy

05/10/2007 12:00 am EST


Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says the wireless technology giant should get past its legal disputes and will show strong growth—at a reasonable price.

Qualcomm (NASDAQ: QCOM) has built its business based on licensing 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 (third-generation) 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. But despite all the great opportunities ahead, progress has been slowed due to patent disputes with a number of companies, including Nokia and Broadcom. The Broadcom disputes have been all but resolved, but Nokia remains a problem. Nokia, essentially, says that Qualcomm is trying to create a stranglehold on the wireless market with its broad base of patents covering CDMA.

The [Finnish wireless] company believes that Qualcomm is charging too much and that it should not have to pay exorbitant royalties. In fact, Nokia says it will stop paying royalties to Qualcomm until an agreement can be reached. Historically, Nokia and Ericsson have backed GSM. As newer versions of CDMA have become standard over next-generation networks, these manufacturers are now questioning how much of Qualcomm's patent portfolio actually covers the latest technology iterations.

Qualcomm just reported its quarterly earnings. For the period in March, the company said that revenues came in at $2.2 billion matching expectations. Earnings came in at 50 cents per share—more than the 48 cents per share expected. The company also generated $1 billion in cash flow and increased guidance for the quarter ending in June to 50 cents to 52 cents in earnings per share. Wall Street has been expecting 48 cents. Qualcomm did use $40 million to buy back one million shares. The company also paid dividends during the quarter of $440 million.

The patent problems have been hanging over shares of Qualcomm for months now and as a result, shares are still down about 20% since peaking above the $53 mark last May. (They closed slightly above $44 Wednesday.)  As a result, the shares are looking more attractive than they have in while. Qualcomm’s price-to-earnings ratio is 30x and its forward P/E is of 20.7x.But given the tremendous opportunities for its technology, its increasing presence in Asia inroads into new markets, I expect shares to continue to rise. I consider this company to be a Wireless blue chip that every wireless portfolio should hold. If you don't have it, buy it.

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