NEW YORK-With the stocks of mobile operators down from their 52-week highs, despite some recent rebounding, now is a good time to buy them, said Sean P. Butson, wireless services analyst for Legg Mason Wood Walker, Baltimore.
Investors have legitimate but overblown concerns about downward pressure on prices to end users, consumer utilization of wireless data, the potential scarcity of spectrum and the realistic prospects for success of third-generation services, he said at a media briefing, Feb. 8. The event was held in conjunction with the publication of a report, “What’s Next for Wireless: A Roadmap for Wireless Investors,” co-authored by Butson and Craig A. Mallitz.
The United States closed out 2000 with an estimated 111 million wireless subscribers, “on a par with the number of residential fixed lines in this country,” the report said. That represents a compound annual growth rate of about 50 percent over the past 15 years, and the take-up rate by Americans actually began to accelerate last year, according to Legg Mason.
By 2010, the investment bank projects that 82 percent of the population, or a bit more than double the percentage today, will be wireless customers. By then, wireless subscribers will average 700 minutes of use per month, up from 245 today.
All of this has occurred as the number of national carriers doubled to six. Just in the last year, Verizon Wireless, Cingular Wireless and VoiceStream Wireless Corp. joined AT&T Wireless Services Inc., Sprint PCS and Nextel Communications Inc. in that category.
The perception is that competition among nationwide, regional and local carriers has caused sharp price declines, which are a boon to consumers but a bane to operators.
“ARPU (average revenue per unit) has leveled off. It’s not declining. We expect ARPU to drop again because of price competition and then level off after 3G,” Butson said.
The 19 pure-play domestic wireless carriers Legg Mason follows are trading “at a fraction of their growth rates,” the Butson-Mallitz report said. This is so even when taking into account estimates of total capital expenditures of $15 per pop for 2.5 G and 3G during the next three years.
“We believe that investors may be overestimating the cost of implementing such 3G systems,” the analysis said.
According to the report, wireless stocks are trading below their potential, even when factoring in assumptions that the 19 carriers will be the only bidders for 700 MHz spectrum and will pay the same high price of $4.18 per pop that was the 1900 MHz auction average.
“With the exception of 3G, no other issue vexes investors more than understanding the spectrum needs of wireless carriers. While most … have sufficient spectrum to serve their existing subscriber bases, many are attempting to obtain more megahertz to provide additional voice and data services,” the report said.
As second- and third-generation networks are deployed, Legg Mason expects wireless data to rise above its lackluster start as a cellular/PCS offering throughout last year. Paging carriers, the data pioneers, already have about 50 million subscribers, the report noted.
However, Butson said he believes it will take a decade before wireless data “represents 10 percent of revenues” for mobile telephony carriers.
By 2010, Legg Mason projects that overall revenues will rise to $130 billion from $58 billion in 2000.
