Nasdaq 4000: Qualcomm Soars Even as 'Aggressive' Price-Target Math Turns Heads

Walter Piecyk is going for the brass ring, but his brassy call has some analysts wondering if he doesn't have a tin ear for the fundamentals.

Piecyk, PaineWebber's telecom equipment analyst, Wednesday set an eye-popping price target of 1,000 on 1999's momentum poster child, Qualcomm (QCOM). Investors responded with customary single-mindedness, bidding Qualcomm shares up some 25% on the session to over 600. But from a fundamental point of view, Piecyk's price target depends on some very aggressive calculations, say analysts and investors who question his findings.

Of course, the buying spree that has propelled the Nasdaq Composite Index to more than 50 records and an 84% gain this year hasn't rested entirely on the traditional understanding of fundamentals, as any number of analysts can attest. As investors have swarmed during the last two months into the stocks of companies that are building the next century's telecommunications infrastructure, valuation questions have increasingly been pushed aside in favor of a determination to not be left behind when the next big thing takes off. Accordingly, popular stocks such as Qualcomm have only seen their stocks rise, in this case more than 2,200% for the year and 70% for the month. With some investors seeing a new era of valuation standards, why not 1,000?

Price Is Right

But even for a company with as much apparent strength as Qualcomm in as frothy a market as late 1999's Nasdaq, valuations will eventually come back into play, say analysts. And that sense points up the weaknesses in Piecyk's case. For one thing, the PaineWebber analyst uses an "extremely aggressive" earnings multiple, says Mark Roberts, a telecom analyst with First Union Securities.

Roberts says Piecyk's forecast calls for a P/E ratio of 175 for fiscal 2000 (ending next September), and a multiple of 55 in 2001. That's well above what Piecyk estimates is the company's long-term growth rate of 45%. "Historically, it's highly unusual for a stock's P/E multiple to be higher than a company's growth rate for any long period of time," says Roberts. Growth rates "almost always slow, and in Qualcomm's case they will when its patents expire for CDMA," he adds.

Roberts is no Qualcomm bear, keeping a strong buy rating on the stock. But Roberts has suspended his firm's price target on Qualcomm at 300 because of "its increasing irrelevance to reality." The firm hasn't done any Qualcomm underwriting.

Noting a projection that pretax profit margins at Qualcomm will jump to 50% in 2001 from less than 20% this year, at least one investor sees red. "It seems like a risky profit outlook," says Steven Esielonis, a portfolio manager with State Street Global Advisors whose firm has a significant Qualcomm position. "We may be looking to take some of our holdings off the table soon. Piecyk's numbers sound huge."

Piecyk didn't immediately return calls seeking comment.

Alphabet Soup

CDMA, as Qualcomm's proprietary code division multiple access wireless standard is known, has been the key to the stock's stellar performance. A March settlement of a patent dispute with handset maker Ericsson (ERICY) ignited the stock after years of nonperformance, as investors saw the roadblocks to Qualcomm's putative domination of wireless telephone technology removed.

The stock's stratospheric performance suggests investors believe CDMA will inevitably become the industry standard. That status would bring Qualcomm, which develops CDMA chips and has sole claim to all royalties from CDMA chip and handset licenses, tons of dough. And that assumption underlies Piecyk's report as well: He expects CDMA phones to earn an 85% share of the wireless market by the end of next decade, up from 18% now.

But phones using the rival TDMA and GSM standards now account for more than half of phones sold worldwide. And it's far from clear that CDMA will in fact emerge as the industry standard, or that there will be a single standard so soon.

The Analyst Game

PaineWebber hasn't underwritten for Qualcomm and is by no means an investment banking powerhouse, so the quid pro quo game that Wall Street so often plays doesn't seem likely to be a factor in the analyst's enthusiasm. But a rival analyst questions Piecyk's motives nonetheless.

"Piecyk may have made such a bold call because he knows he should have been covering Qualcomm eons ago," says one West Coast-based Qualcomm analyst who requested anonymity.

Maybe investors should note where this call is coming from, adds one envious analyst. "He's not only late to the party," the analyst says. "For a retail firm, that's some kind of call to make."

But given Qualcomm stock's performance Wednesday, perhaps another call to keep in mind is Henry Blodget's Dec. 16, 1998, eyebrow-raiser on Amazon.com (AMZN), in which he set a price target of 400. Three weeks later the stock shot past the target on a postsplit basis. Less than two months after that the analyst took a job at Merrill Lynch, replacing the soul who dared to set a price target of 50 on Amazon.

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