We have been the beneficiaries of one of the great manias of all time, the Internet mania. The mania is soundly motivated, in that the Internet will indeed change our lives, our productivity, and our ways of earning and spending money. And, manias are very good for the economy, in that they foster progress and create wealth. Mania goes to the heart of the pioneer spirit. The freedom of the public to be involved in it is a strength of this country.

Since the days of Christopher Columbus and Queen Isabella, humans manifested the urge to get rich quickly by making speculative investments. To quote veteran technology venture capitalist Robert McNamee, "There were a whole bunch of industries funded on the backs of gigantic manias, many of which led to great industrial revolutions, its in our genes. When great new technologies come along, whether they are canals, railroads, autos, computers, or the Internet, everybody wants a piece of the action. Speculation tends to go hand in hand with entrepreneurship."

The United States economy is a nurturing environment for this cyclical behavior. Reasonable capital gains tax rates combine with immense levels of fast-moving capital to create new industries, as the speculator’s urgent greed overcomes painful memories of earlier excessively speculative behavior. It has led to the creation of some wonderful, world dominating businesses, such as Coca Cola, Microsoft, and QUALCOMM. It has spurred strong economic growth.

The downside of manias is that for each company that has succeeded, about eighteen fail. This occurs because capital flooding into the hot new industry funds the creation of more companies than can reasonably fill the space. Then, industrial Darwinism takes over, and the weak competitors fall by the wayside. Fortunately, we forget the failures as they, in time, disappear from view, and remember the few huge successes. Then, the indomitable gold-rush spirit is reborn, and the cycle repeats itself.

As we said above, the Internet is a mania. Looking back on the PC mania, the disk drive mania, and the biotech mania, about 5% of the companies that went public in the midst of the feeding frenzy actually made their public investors a decent rate of return. Likewise, only a small minority of companies participating in the Internet mania will prove to justify their current market capitalizations.

We believe that QUALCOMM will be one of this select group of companies. It operates at the convergence of the three drivers of the "New Economy," connectivity, interactivity, and mobility. The company is at the beginning of a long product cycle that is expanding exponentially. Finally, it is the only company I know of in the Internet mania that actually OWNS the intellectual property that forms the foundation of its proprietary product franchise.

QUALCOMM held its annual financial analysts meeting on February 17 and presented a progress report. There are several issues I keep an eye on that impact the development of QUALCOMM’s business plan and the long-term appreciation of the stock.

1. Is the business plan sound? Yes, world telecom regulators and companies agree that CDMA is the technology upon which the next generation of wireless will be based.
2. Is subscriber growth still explosive? Prudential Volpe projects that the number of digital wireless subscribers will grow from 465 million in 1999 to 1.8 billion in 2005, and that CDMA will grow from a market share of 13% to 40%.
3. Are the CDMA markets and geographies expanding? Fresh back from signing licensing agreements in China, QUALCOMM management has been told by the government of China that there will be 10 million CDMA subscribers by year end. Management likes that projection, but feels it is optimistic.
4. Is ownership of the intellectual property rights secure? Management presented the position that the IPR’s are secure, "there is no other remotely comparable CDMA patent position." Texas Instruments, which does not yet have a license to QUALCOMM’s 3G CDMA, has publicly questioned the vitality of QUALCOMM’s intellectual property rights concerning 3G CDMA. You may remember when Ericsson used the same ploy to negotiate a license to CDMA, and they ended up in court. I reviewed the court filings, and kept my faith in QUALCOMM while those less inquisitive proclaimed skepticism. (This had a lot to do with the fortunes we have made in QUALCOMM.) Ericsson capitulated, and now states that QUALCOMM pioneered CDMA and owns "patents that are essential to make, use and sell products which comply with the standards based on CDMAOne, CDMA2000, and WCDMA."
5. Is management still visionary and are they executing well? Yes, Irwin Jacobs is still a man on a mission, and his managers are executing well.
6. Is QUALCOMM one year ahead of competitors in CDMA chip technology? Yes, the 90% market share is a pretty good indication, as is the fact that Motorola is their fastest growing customer. QUALCOMM continues to add to the capabilities and performance of their chips, with the ultimate goal being to have the whole phone on one chip. It’s incredible what capabilities QUALCOMM is designing into the chips: the same audio and video processing capability of a PC, karaoke, connectivity to most network types, global positioning, compatibility with popular computer operating systems, voicemail, CCD/CMOS image sensing, voice recognition and recording, and SIM card compatibility. Which of these you get to use is up to the provider of your cellular service.
7. Are QUALCOMM’s chip prices holding up? Fairly well, it seems. The continued inclusion into the chip of components that used to reside on the phone’s printed circuit board effectively moves revenues from component suppliers to QUALCOMM, offsetting price pressures.
8. Has a superior wireless technology cropped up? Not that I have seen, and I keep watching. A technology that facilitates data transfer over GSM networks, acronym "EDGE," is available. It is currently capable of handling 8.6kbps while HDR CDMA currently handles 64k. EDGE will get some usage in Europe until the move to 3G CDMA, which, with 2500kbps capacity, obsoletes it.

In summary, the overall picture for QUALCOMM looks excellent. I am still concerned about the level of technology stocks in general, and expect QUALCOMM’s stock price to be impacted both by news related to the development of its business and by the fluctuations of the telecom technology stock group.

Steven L. Ré, CFA

February 18, 2000

The above is for information purposes only and is not to be construed as a recommendation to purchase or sell securities. The above information is from sources deemed reliable but is not guaranteed. It should not be assumed that investments in any of the above mentioned securities will be profitable, and past performance is not a guarantee of future results. Earnings projections often miss, and markets don't always go up. The employees and families of Quality Growth Management, Inc. may own the above mentioned securities in their own accounts, and may trade them at any time without notice.