Tinker, thanx for your generous reply on Qcom and ARM.
My investment pattern resembles yours. Although, in following your various posts, I think you do some trading, such as Rambus. Different styles. Maybe it's because us docs are busier than you lawyers, so we don't have as much time to trade? <g>, just teasing.
I'm posting initial comments from the Fool board from Brational, the resident expert, IMHO, on Qcom. Tinker, I know you have already seen them; this is for our colleagues at G&K who don't subscribe to The Fool.
"I was out of the country when earnings were released, and did not have access to my spreadsheets with Qualcomm results. I apologize for failing in my duties, but I did notice that IC, BDaz and Dave Mock have taken up the slack, and then some. I did write some initial reactions to post while in Europe but somehow the Fool Board “ate” my long tirade and I got discouraged.
This would not be the first time that the market punishes the stock after stellar performance. In fact I think this seems to be more the norm than the exception. Especially this market, which seems intent on punishing tech stocks of every stripe. But almost every time that the price has suffered after an earnings release, it has come back and climbed higher, as predictably as the performance of the company has been over the past 12 or 15 quarters.
I have looked over the earnings release, read the numbers and the statements, and I fail to see anything that 99 percent of the companies in this world would not wish they could have accomplished. The year-over-year growth, both top line and bottom line, has been remarkable for a company of this size; the margins in both chipsets and especially in royalties are amongst the highest in the S&P 500, feeding into a cash stash that is now over $8B; and even BREW is beginning to make money.
One major transformation that the company has gone through in the past couple of years, since WCDMA started becoming a factor, is the robustness of its earnings. No longer are results dependent on what happens in Korea, China, or India, or with Verizon in the US. One market can get weaker in any given quarter, but overall company results remain solid and essentially on track. It used to be that we lived and died by the decisions of the Korean regulator to enforce handset subsidy bans on one or more of the operators, or the Chinese carefully-timed pronouncements on whether Unicom will take up CDMA or not. We sweated the details of protracted negotiations with the Nokias of the world about recognizing QCOM's intellectual property claims in WCDMA, then lived through the ups and downs of technological and market glitches of UMTS. QCOM management positioned the company's business admirably in terms of winning those battles, benefiting from two technology renewal cycles in its core CDMA (from 2G to 1X, and now again to EV-DO), and now entering a new competitive field in the much larger GSM world through WCDMA chipsets, all the while cushioned by royalties on every single WCDMA handset and data card sold, regardless of chipset inside.
Conventional wisdom holds that high reward calls for high risk. Those who rode through the higher risk days have indeed been rewarded; and now, as the risk appears lower going forward, with so many things lining up right for the company, perhaps the potential reward is thought to be less. What the market is telling us is that it is perhaps no longer enough for a company with over $6B in annual revenues to grow by better than 25% a year, execute admirably on all fronts, consistently exceed guidance, be the undisputed technology leader in its sector, be several years ahead of the curve in its vision for wireless in our society, etc…
Or perhaps the market is telling us it is confused, and does not understand the first thing about this sector, which would certainly not be the first time, nor the last. The downside risk in the company's performance is indeed quite well contained at this stage— the company guides for it, and will exceed it. But the potential upside is still very much beyond these conservative estimates, if not in the next quarter or two, then not much further into the future. The competition between handset makers is heating up on the high end like it has not in a while; there is every indication that a major replacement cycle is underway globally towards higher-end smart phones (I recently bought a Treo 650, only to find that many of my colleagues had done the same thing…). Wireless services are slowly but surely creeping in and on the cusp of a major rise. This all calls for better-featured and more expensive chipsets, and QCOM's QSI will continue to benefit. Handset ASP's are on the rise instead of declining that they had towards the end of the 2G cycle; coupled with larger handset volumes, we'll continue to see higher QTL numbers.
I have shown several times how actual performance has significantly exceeded initial guidance given by the company over the past eight or so quarters. The surprise factors are now looming larger than they have over that period, yet we are still getting guidance comparable in magnitude to the initial conservative guidance we have become accustomed to from the company. The market has chosen to value the company at what many analysts consider below the value that should be accorded to the conservatively-guided company performance. Call it the low-risk valuation. Those of us who have followed the company's business over many years seem to believe there is much more in store; that's perhaps the higher risk scenario for this company's performance. Once the market understands this higher-risk scenario, we will at least get our low-risk valuation, plus a well-deserved quality and consistency premium. Eventually, as the higher-risk scenario starts proving out, so will the reward.
I'll crunch the numbers through my spreadsheets in the next day or two. Again, apologies for failing to deliver on time.