NEW YORK-While Asian troubles may obscure the big picture for awhile, international growth and the integration of wireless and wireline telephony will mean plenty of opportunities for wireless manufacturers, according to one analyst who tracks those stocks.
“Mobile is great, but it’s getting hard to invest in because it’s a maturing industry. You have to pick stocks carefully,” said Jeffrey Schlesinger, senior wireless analyst for UBS Securities L.L.C.
He addressed the New York Society of Security Analysts last week on “Investment Opportunities in the Changing Wireless Communications Marketplace.” The presentation focused exclusively on the manufacturing component of the industry.
In the short run, financial difficulties faced by some Asian nations are obscuring the bigger picture view. About 80 percent of Asia’s wireless subscriber growth during the next several years is expected to come from four countries: Australia, China, Japan and South Korea.
“Japan and China are the only two Asian countries that really matter. As China goes, so goes the whole sector,” Schlesinger said.
“If China goes into the abyss, you don’t want to be in Nokia (Corp.), (L.M.) Ericsson or Motorola” Inc. stock, Schlesinger said.
After celebrating the beginning of the Year of the Tiger, China could devalue its currency by as much as 15 percent, and this would have a negative ripple effect. However, China plans a major investment in wireless telecommunications infrastructure.
The newly deregulated European telecommunications marketplace likely will make significant investments in networks during the next several years. Brazil promises to be another big opportunity once haggling ends over its spectrum auctions. While infrastructure spending is slowing in the United States, the next big development here will be the integration of wireline and wireless networks.
“AT&T (Corp.) and Sprint (Corp.) will start to tie all these networks together. This will be a software story.”
On the infrastructure side of the business, Schlesinger said that even taken together, the major vendors-like Nokia, Ericsson, Motorola, Alcatel Telecom and Siemens Stromberg-Carlson-lack the capacity to handle demand for all the various wireless technologies. However, that situation doesn’t make a stock picker’s choice any easier.
“There are a lot of new players and they are what drives our business, but it’s tough to figure out who the winners are,” he said.
“Too many companies are going public on a whim. We see so much [garbage] out there.”
In the short run, the biggest competition faced by established handset manufacturers headquartered in Europe and North America are Asia-based companies.
“The Asians pose a bigger threat than they were six months ago,” he said.
“Samsung (for example) will export its way out of its troubles … A lot of the handset guys from Asia will pour into the [United States].”
Because they lack institutionalized expertise in Global System for Mobile communications technology, Asian handset vendors’ most likely targets in the Western Hemisphere are Code Division Multiple Access and Time Division Multiple Access technologies.
CDMA and TDMA technology, starting from a lower installed base, will post larger percentage gains than GSM during the near term. This will help component manufacturers specializing in these technologies.
Asian phone manufacturers also have compressed product life cycles, giving an opportunity to distributors like Brightpoint Inc. because carriers don’t want to be stuck with outdated inventory, Schlesinger said.
Over the long haul, the international growth opportunity in wireless communications will transition from mobile to fixed. Many of the small, privately held Silicon Valley companies experimenting today with wireless local loop technologies are likely to be acquired by the major manufacturers.
To reach the purchasing ability of the second 20 percent of populations in key developing nations would require halving the price of wireless local loop, he said. So far, only tiny upstarts are endeavoring to move that price point down.
“Lucent, Nokia, Ericsson, Alcatel, Siemens-the guys who sold base stations in the old wireless world-will be industry consolidators. They haven’t gotten around to it yet.”
Qualcomm Inc., an American CDMA infrastructure and handset maker, probably also will become a takeover target, Schlesinger said. “The beauty of CDMA, its essence, is how it `packet-izes’ voice (communications), but Qualcomm stock moves on emotion and is difficult to follow,” he said.
“Their infrastructure business is killing them. Their operating model doesn’t fit their market opportunity. If they ever sold their infrastructure business, their stock would go up 30 percent.”
