Nasdaq 4000: Interdigital Rides Qualcomm's Coattails

SAN FRANCISCO -- Despite indications from investors Wednesday that Qualcomm (QCOM Quote) has no worries, the wireless technology provider may actually have a competitor. Or at least some investors seem to think so.

Interdigital Communications' (IDC Quote) stock soared on Wednesday, leaping 61%, or 14 7/16, to 38 at the New York close (it subsequently rose as high as 55 in after-hours trading before settling at 50). Perhaps that's because King of Prussia, Pa.-based Interdigital has patents based on the very wireless technology that has investors so worked up about Qualcomm.

Qualcomm climbed a mere 31% to 659 Wednesday after a PaineWebber analyst started coverage with a 1,000 price target. (PaineWebber hasn't performed underwriting for Qualcomm.) Analyst Walter Piecyk's bet is that Qualcomm's CDMA wireless standard will become the global standard for wireless technology, generating enormous growth, a lush, unfettered royalty stream and 50% pretax profit margins for years to come.

Interdigital, it turns out, owns some 14 patents for CDMA technology. A hedge fund manager who declined to be identified says Interdigital's patents will be needed for the development of third-generation wireless phones, expected to start arriving as early as 2003. And Interdigital has a partnership with Texas Instruments (TXN Quote) that could give it a strong position in competing with Qualcomm.

Will Strauss, an analyst at Forward Concepts who tracks this market, says Texas Instruments and Interdigital together could offer Qualcomm some stiff competition in CDMA technology. (Forward Concepts is a consultant for TI.) Already, TI is designing new chips with Interdigital's patents.

And "Texas Instruments is tied at the hip with Nokia (NOK Quote)," he says. Nokia is the world's leading seller of wireless-phone handsets, though in the past it has lagged competitors in selling CDMA-based phones.

Until now, Interdigital has operated in a niche market for wireless devices, but hasn't been very active in the phone market. But as CDMA technology gains adherents, an alliance of Nokia, TI and Interdigital could be quite formidable, says Strauss.

In its annual report filed Nov. 17, Qualcomm reported that it had licensed patents from Interdigital essential to its own CDMA technology. That day marked the launching point for Interdigital stock, which had hovered around 6 per share for years. Since Nov. 17, the shares have jumped more than 700%.

"Qualcomm will try to force its patents on everybody, but don't believe Qualcomm will own the world," says Strauss at Forward Concepts. "Interdigital was doing CDMA before Qualcomm even thought about it."

The Interdigital investor says that for Interdigital, which generated just $99 million in revenue for 1998, just a tiny piece of Qualcomm's CDMA business could mean significant growth. And that could mean more growth in the stock.