Qualcomm, Walt Piecyk and Investors' Changing Expectations

Casualties of the Nasdaq's mighty fall abound, but Walter Piecyk might be a good place to start.

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Remember him? At the tail end of 1999, the PaineWebber analyst started coverage of one of the tech bubble's great go-go stories, Qualcomm (QCOM Quote), with a buy recommendation. Even though the stock was well on its way to a 2,600% rise for 1999, Piecyk ambitiously predicted the wireless telecom technology outfit would see its shares double again in the next year, hitting the gaudy presplit price of $1,000 (the company had already announced a 4-for-1 stock split that hadn't taken effect). Needless to say, the call garnered Piecyk enormous attention.

Today, Qualcomm has returned to Earth, closing Tuesday at $52.81, 58% less than its split-adjusted price at the time of Piecyk's call. And Piecyk? Well, he was out of a job after Swiss bank UBS (UBS Quote) bought PaineWebber last November. Since then, "I have not yet begun to actively seek employment and have preferred to spend the time with my wife and 15-month-old son," he writes in an email. He is, however, mulling his options, which include forming a partnership investing in communications companies, writing a book about his analyst days and even working in customer service at online broker E*Trade (ET Quote).

In any case, it now seems safe to say that Piecyk, who holds a bachelor's degree from the University of Pennsylvania's Wharton School, made an ill-advised call. But his journey from highflier to suburbanite illustrates the sea change in the mentality of investors during the past year. In particular, the prospects for the wireless world were widely taken to be extraordinarily good a year or so ago, when the Nasdaq hit its now-improbable high and Piecyk made his now-improbable call.

Blue Sky

Sure, that $1,000 price target looks "audacious," as Keith Goddard, director of research at buy-side firm Capital Advisors, says. His firm has a position in Qualcomm. But December 1999 was a time of eternal optimism about the market and about the world of wireless data.

Lower EPS estimates sliding since Piecyk call

Source: First Call/Thomson Financial

In his Dec. 29, 1999, report, Piecyk billed Qualcomm as the way to invest in the long-term growth trend of data delivered over wireless devices. At the time it appeared to be a plausible conclusion, given the mounting excitement over high-speed, third-generation data networks. After all, Qualcomm holds many patents for the code division multiple access, or CDMA, technology used in those networks. It also makes the chips for many of the phones that operate on one type of CDMA-based network.

Indeed, "Qualcomm is a big play on the move to 3G," says Goddard. "3G will be a big payday for Qualcomm. The thought was there would be 1 billion 3G handsets out there with some form of CDMA."

One of the headlines in Piecyk's report reads "3G Is CDMA." He went on to write, "Third Generation wireless technologies promise to accelerate wireless data transfer rates to cable modem and DSL speeds of 2 MBPS [megabytes per second] from the less than 56 KBPS [kilobytes per second] being offered today. Our discussions with operators, equipment suppliers and technology consultants lead us to believe that CDMA is the most efficient technology for increasing data transfer speeds."

He continued, "We believe by the end of the next decade 85% of phones sold will use CDMA technology (up from 18% today) resulting in ... up to a $20 billion royalty stream for Qualcomm." So far, Piecyk's scenario has yet to kick in. At the end of year 2000, CDMA subscribers made up only 12% of the world's 690 million wireless subscribers, according to research firm EMC.

Margarine

The key word in Piecyk's musings is "promise." So far, 3G is a promise that's gone unfulfilled. The upgrade to 3G is hardly imminent. Some industry players and analysts even believed that 3G could come on line as soon as mid-2001. Of course, now in early 2001, carriers are upgrading only to 2.5G networks.

Now it's assumed that 2003 is the absolute earliest date for widespread 3G rollouts, with Irwin Jacobs, founder and chief executive of Qualcomm, estimating recently that wideband CDMA, anticipated to be the most widespread type of 3G technology, may in fact be delayed until late 2004 or early 2005. (However, Qualcomm expects CDMA 2000, another type of 3G technology, to come on line later this year.)

The reasons run from a lack of available handsets and useful applications to a group of cash-strapped carriers that overpaid for 3G spectrum and don't have the funds to build the requisite networks.

Descending Dropping P/E ratios at Qualcomm

Source: Baseline.

Also gone awry was a belief that China, slated one day to be the largest wireless market in the world, would adopt CDMA technology. Only at the end of last year did China's Ministry of Information Industry endorse an earlier agreement for China Unicom to adopt CDMA.

In his email, Piecyk also points out that the outlaw of subsidies by the Korean government and the slowdown in global demand for mobile phones have reduced near-term earnings-per-share estimates.

But Piecyk is as optimistic as ever. "Ten years from now, the majority of new phones sold will likely be third generation phones, and whether the flavor of 3G used is W-CDMA, CDMA 2000, 1extreme, 3XRTT, Qualcomm believes that it holds the critical patents which will pay it a royalty for every 3G phone sold in the world and it has the lawyers and court verdicts to back it up," he writes. "The key factor therefore becomes what percentage of phones sold in 2010 will be 3G. If the transition to digital [from analog] during the 1990s is any clue, it is likely to be over 90%."

Whatever Piecyk's fundamental views, his timing will always haunt him. During his tenure as an analyst, he just about caught the top of the market, in terms of Qualcomm's stock price and valuation. Five days after his initial call, Qualcomm hit a high of $179.31, giving it a 2001 price-to-earnings ratio of 135.8. Qualcomm's share price bounced about for the next year but generally slid downward. On Tuesday, the stock traded at 41.9 times 2001 earnings. Meanwhile, the benchmark S&P 500 index had a forward P/E of 25.6 in January 2000; it's down to 20.8 times today.

The upshot? "They're participating in 2.5G to some extent," says Capital Advisors' Goddard of Qualcomm. "But they need 3G to really become a home run."

As for Piecyk's call, Goddard remarks, "We were in Qualcomm at the time, and I remember thinking, That's a real stretch. That's assuming some pretty generous multiples and cash flow."