Nasdaq Selloff: Qualcomm Shows the Dark Side of Momentum

The party turned nasty today as last week's darling plummeted 38 points from Monday's close.
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SAN FRANCISCO -- A day after its shares set an intraday record in hitting 200,

Qualcomm

(QCOM) - Get Report

chalked up a 17-point drop Tuesday, closing at 162 1/16.

And while some analysts see room for a rebound in the stock, they point out that today's turmoil should remind investors of the volatility in the company's shares, as well as in the broader market.

Investors didn't have to confront the darker side of stock volatility during the last two months, when Qualcomm jumped about 200% and the

Nasdaq Composite

rose about 40%. However, reality came crashing down Tuesday when Qualcomm gave up nearly 10% of its value.

One of the biggest stars of 1999, Qualcomm increased 27-fold last year, thanks to the conviction of investors that its code division multiple access, or CDMA, technology will become the worldwide standard for wireless telecommunications. Qualcomm sells CDMA chipsets and is expected to reap a windfall by licensing its technology to the builders of tomorrow's wireless Internet. Never mind that CDMA, along with Qualcomm, faces plenty of

competition.

More than concerns about

rising interest rates, it was a break in momentum caused Qualcomm to stumble. On Dec. 29,

PaineWebber

analyst Walter Piecyk predicted the stock would jump to a split-adjusted 250 in 12 months; the stock added 40 points to its share price in just hours, reaching 165. Two days later, Qualcomm held a 4-for-1 stock split, a cosmetic move that often attracts retail investors.

"This thing's in the nosebleed section," says equity analyst Ed Snyder with

Chase H&Q

, making the stock acutely sensitive to turns in sentiment. Indeed, Tuesday's drop doesn't appear to be driven by fundamentals. While the Nasdaq fell 229.5 points, or 6%, to 3901.6 Tuesday as investors fretted about rising interest rates, those rates have little direct bearing on Qualcomm's business, as the company generally does not finance its customers. (Chase H&Q has no underwriting relationship with Qualcomm, and Snyder rates the shares market perform.)

"It would be nice if we didn't have this type of volatility, but it's a fact of life," Qualcomm CEO and Chairman Irwin Jacobs told

CNBC

as trading wound down on Tuesday.

Other stocks that have surged more on momentum than on fundamentals slipped Tuesday. Networking star

JDS Uniphase

(JDSU)

fell 9% to 171 1/8.

DoubleClick

(DCLK)

slid 12% to 237 1/16. But e-commerce play

Commerce One

(CMRC)

, which took an early dive last week after rising to 331, rebounded 7% to 218 1/2, indicating some demand for beaten-down shares.

There remain some clouds on Qualcomm's fundamentals horizon. Snyder says Qualcomm might shudder when

Motorola

(MOT)

releases a chipset that, as announced in the summer, will compete with Qualcomm. Investors also will focus keenly on whether CDMA becomes the standard, Snyder says. "At this valuation, everything has to work." Qualcomm trades at 523 times earnings and 27 times revenue for the trailing four quarters.

Still, the Qualcomm phenomenon won't be easy to derail, according to Mike Hurley, a technical analyst with the online investment bank

E*Offering

. Hurley says Qualcomm has found support near 160, where it had rested on Thursday before sprinting higher. (E*Offering has no underwriting relationship with Qualcomm.)

"So far, it looks like momentum is still with the bulls, and I would give the stock the benefit of the doubt."

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