NEW YORK-Amid the clutter of conflicting and shifting capital market indicators, the outlook for companies in any sector related to wireless telecommunications nevertheless appears positive.
The daily whipsawing of the Nasdaq, where the stocks of many high technology companies trade, may obscure but does not diminish the communications revolution unfolding worldwide and the key role of fixed and mobile wireless in this transformation.
The shorthand of conventional wisdom is that a rising tide, like this seminal change in telecommunications, will lift all boats. However, some will be beached, many will rise and the degree of ascent will vary from one to another.
No commandment of capitalism exists to dictate that every company seeking to go public will automatically pass that milestone exactly when it wants to, raise as much in its stock market debut as it hoped for or experience a steady increase in share price afterward.
But for every company that has postponed its IPO, as did At Road Inc., a Fremont, Calif., wireless tracking company, still others see their IPOs go to market above pre-sale price talk, as happened to Floware Wireless Systems, an Israeli wireless broadband equipment company.
In each case, many factors must be considered, including investor sentiment about the fundamentals of an individual company and the influence of general short-term market conditions unrelated to a particular company. These are likely to change-both for better and for worse-at any given point in time.
“Companies with a track record of strong revenue growth and profits have fared well over the last couple of weeks,” said Paul Bard, a securities analyst for Renaissance Capital Advisors, New York, manager of the IPO Fund.
In particular, telecommunications and networking equipment companies have shown good results in recent offerings, he added.
A good leading indicator of public capital market sentiment is the venture capitalist community. Their private equity infusions are given with an explicit exit strategy of either taking companies public or selling them to larger enterprises.
One such firm, Blueprint Ventures, San Francisco, invests only in businesses it is convinced have a very good chance of becoming free-standing public companies.
“We believe communications is not just a sector of the economy. It is the economy, and this is just the beginning of a worldwide trend,” said Christopher Kersey, a general partner of Blueprint and formerly a data communications strategist for Telefon LM AB Ericsson.
“Turbulent markets are not necessarily bad. In fact, they are good because they get rid of excess valuations and companies without strong business models.”
Kersey, who focuses on investments in data communications equipment, Internet infrastructure and wireless, said he likes businesses whose technologies are not dependent on any particular carrier. Blueprint Ventures’ wireless world is divided into two primary parts, broadband equipment and consumer/business applications.
“Broadband equipment and component manufacturers are a sweet spot for investors who understand the space,” he said.
“Consumer/business apps could be sub-labeled content infrastructure. These are companies involved in caching and distributed content delivery, pushing content out to the edge of networks, allowing data interactivity for a more seamless experience.”
Wireless-only funds
Another telling capital market indicator about the allure of wireless is a very recent phenomenon, that of wireless-only mutual funds. At least four have opened for business since late February, and Fidelity Investments has registered to launch a fifth, the Fidelity Select Wireless Fund.
“Our fundamental belief is to offer funds designed around the concept of change,” said James J. Atkinson Jr., president of Guinness Flight Investment Funds, part of Investec Asset Management, Pasadena, Calif.
“We are in the early shift to wireless, and people don’t realize how big it’s going to be.”
By late June, four months after its debut, investors had placed about $41 million in Investec’s Guinness Flight Wireless World Fund. Its largest holdings including Nokia Corp., Vodafone AirTouch plc, L.M. Ericsson and Alcatel Alsthom.
“The outlook for wireless communications is continuing to accelerate. I believe we will see strong earnings in wireless infrastructure players and component manufacturers going into the end of the year,” said Jeffrey Provence, co-manager of Value Trend Capital Management’s new Wireless Fund, San Diego.
“In the not-too-distant future, tethered phones will be a thing of the past. I believe that personal communications devices will someday be a as common as a wristwatch.”
From its April 3 start date through late June, the fund had accumulated $24 million in assets. About 40 percent is allocated to major players, like Nokia, Ericsson, Nortel Networks and Texas Instruments. An equal percentage is devoted to components makers, like Analog Devices, that have reported net margins of at least 40 percent.
“You can’t just go and start a semiconductor company like you can a dot-com,” Provence said.
The remainder of the portfolio is invested in newer companies with high research and development costs, like those in the broadband wireless sector.
“They have huge potential, but just haven’t gotten to the mark yet,” he said.
The Turner Wireless Fund, Berwyn, Pa., opened for business on July 1 with this stated philosophy. Taken as a whole, communications-related companies will appreciate in value faster than the overall economy in the coming years.
However, there is one apparent paradox in the rationale behind many stated investment goals for wireless telecommunications. The buy side seems to favor the equipment and components side of the sector, rather than the telecommunications carriers, which are or will be their customers.
This preference cannot be attributed to lagging subscriber growth. In the United States, second-quarter subscriber growth was sizzling, said Jeffrey L. Hines, managing director and senior wireless analyst for Deutsche Bank.
“To date, subscriber growth is tracking toward a better than 30 percent acceleration, year-to-year change in net additions,” he said in late July.
“Further, sub results are 5 percent higher than our expectations … and we tend to forecast toward the high end of the Street.”
It also is important to consider that this growth spurt applies not only to relative newcomers, said Fred Moran, managing director in charge of wireless telecommunications research for Jefferies & Co. Inc., New York. Companies in this category, like Nextel Communications Inc. and Sprint PCS, can skew readings upwards because they show strong percentage increases on a smaller customer base. Even incumbents like Verizon Communications Inc. and Alltel Corp. are reporting 30 percent year-over-year net customer additions, he said.
Equally important, price declines in services due to national rate and bucket-of-minute plans have led to flat rather than falling overall revenues, Moran said.
Furthermore, market analysts routinely factor in capital expenses associated with upgrades in an industry like wireless telecommunications, which is subject to rapid technological change. Consequently, spending for next-generation wireless services, which promise high returns on investment, do not pose a damper on investor expectations, Moran said.
Nevertheless, he noted, “wireless operators’ (stocks) have under-performed year-to-date, down 14 percent, due to the overhang of rising interest rates and general market malaise.”
Mutual fund managers eschewing telecommunications carriers in favor of vendors may be concerned about the highly competitive environment in which service providers operate these days, Moran said.
“In reality, both the service and equipment groups are attractive in their own right. Equipment may have less competition, but only
benefits from one-time sales, while service has recurring revenues,” he said.
“To the degree there is vibrant demand worldwide, the outlook is good for all players. In the U.S., we think fundamentals remain very sound. Valuations are supported by attractive transaction values derived from consolidation. The $22,000 per sub offered for VoiceStream blew away any prior offer.”
