Financial analysts are beginning to conservatively incorporate potential wireless data revenues into their valuations of wireless carriers, and many are looking to the future, realizing wireless operators should be evaluated like Internet stocks.
This measurement will have huge implications for the wireless industry. Investors have historically valued Internet service provider subscribers much higher than wireless operators even though wireless carriers’ customers generate thousands more in revenue over their lifetime.
“[Investors] are starting to judge these companies on revenue multiples and not earnings,” said Mark McKechnie, analyst with Banc of America Securities.
Timothy O’Neil, wireless analyst with SoundView Financial Group in Stamford, Conn., has come up with a model he has begun incorporating that views wireless service providers as an extension to the Internet, allowing the market to look at the anticipated future revenue streams from the Internet.
“Not having any clear indication on how much revenue will data bring in the future, we came up with another matrix to look at and to put the industry on a relative scale with other service providers like cable, ISPs and terrestrial mobile voice/data providers that base their businesses on annuity streams,” said O’Neil.
The financial gains for carriers offering wireless data seem endless. Future applications range from advanced e-mail capability to heavy e-commerce. But carriers today are limited by bandwidth, coverage and content dumbed-down to fit small screens, causing limited acceptance from today’s subscribers, said O’Neil.
“Not to say these companies should be at the same lofty valuations as an integrated [Internet service provider], however, the anticipated future revenue streams for an ISP are also applicable to the mobile wireless carriers,” said O’Neil. “The limitations of the wireless carriers, we believe, are only temporary and are based on ergonomics, capacity and software.”
O’Neil has begun using this matrix whenever SoundView reports on companies, though it still incorporates a 10-year discounted cash flow using industry accepted multiples and discount rates. Today, O’Neil has conservatively increased his average revenue per user projections by both $5 and $10 to incorporate data revenues.
Other analysts like Perry Walter with Robinson-Humphrey Co. in Atlanta have taken an initial swing by updating models and increasing price targets on a few carriers. Walter increased price targets between $30 and $40 on Sprint PCS, VoiceStream Wireless Corp. and Omnipoint Corp. in January.
“We don’t really know what these carriers have or how smooth the transition will be,” said Walter.
Walter, however, believes that more than 50 percent of Internet hits will originate from a wireless device by 2004 as faster packet networks roll out.
“Naturally, we anticipate some very positive impacts on revenue and cash flow for PCS carriers who can successfully branch into this arena,” said Walter. “We are forecasting 15 percent to 20 percent of incremental revenues and, due to minimal incremental costs, a conservative 50 percent to 60 percent in incremental EBITDA margin as targets for selected companies under our coverage.”
Lehman Brothers Inc. recently revised upward its outlook for wireless data penetration and incorporated some of the assumptions into its stock recommendations. It expects wireless data penetration to increase from its estimate of 25 percent of voice subscribers to 50 percent by 2007.
Donaldson, Lufkin & Jenrette made significant changes to its projections for the industry, raising penetration assumptions, including a data model for the first time and increasing private market value and target prices as a result of higher penetration and revenues from data. DLJ estimates that 50 percent of subscribers will be using some mobile data applications, and data will account for 22 percent of revenues by 2004.
“The bottom line is to raise our valuations 25 (percent) to 30 percent on average, as a result of higher penetrations, terminal multiples, lower discount rates and discounts of target to private values-all of which we feel more than justify the exceptional price increases the group achieved last year,” the firm said.
Reporter Antony Bruno contributed to this story.
