3 Wireless Plays for 2002
3 Wireless Plays for 2002
By Hal Plotkin
CNBC.com Silicon Valley Correspondent
Jun 18, 2001 02:11 PM
Several analysts say the wireless sector’s recent plunge has opened up attractive buying opportunities at some smaller wireless enabling firms such as 724 Solutions Inc. {SVNX}, Aether Systems Inc. {AETH}, and Openwave Systems Inc. {OPWV}.
Given current market conditions and the uncertain state of the economy, it’s likely that investors will have to wait at least a year to find out if the optimism is justified. But if the predictions pan out, investors could secure some rather nice returns by getting their bets down now on firms that are taking an early lead in creating the software infrastructure for the first wave of practical data-intensive wireless applications.
On Thursday, New York-based FAC/Equities analyst Etan Ayalon initiated coverage of 724 Solutions, Aether Systems and Openwave Systems with buy recommendations on all three. The analyst set 12-month price targets of $14 on 724 Solutions, $18 on Aether Systems, and $50 on Openwave Systems.
Ayalon also released a 400-page report this week that focuses on the short and long-term future of what he calls the movement toward “pervasive computing.”
Aether Systems, Openwave Systems and 724 Solutions 52-week stock performance comparison
“It’s a massive, long-term trend,” he says. “Pervasive computing is about enabling people to get immediate access to information and services anywhere, anytime, simply, and intuitively.”
Tales of fanciful wireless applications whose actual widespread deployment is uncertain have already burned many investors, even when those areas appear very attractive. Eventually, for example, it’s quite likely that parents will be able to get live video and audio feeds from their children’s school classrooms or daycare facilities piped directly to a small screen on their web-enabled cell phones or personal digital assistants, say, to watch a school play or a report presentation.
Others predict that wireless users will also be able to more easily exchange data, comparison shop, and enjoy a wide variety of new entertainment services once broadband wireless connections are more readily available.
It’s the waiting, however, that is driving at least some investors nuts.
Which is one of the reasons Ayalon and others recommend investing in niche companies that already have real customers in growing markets rather than betting on firms such as wireless carriers who may or may not do a good job of capturing revenues from those markets.
“It’s not going to be five to 10 years,” says Charul Vyas, an analyst with International Data Corp., based in Austin, Texas. “All the U.S. carriers are upgrading their networks now. End users are not comfortable with slow data rates. Consumers will be much more likely to use those services when the data rates improve, but it is going to take some time.”
In the meantime, however, Ayalon and others say the best bets right now can be found among the smaller software firms that have shown they have the technical building blocks needed to rollout successive waves of new wireless services, particularly in the financial services, corporate, and carrier markets.
Although all three firms are yet to turn a profit, wireless experts on and off Wall Street agree that 724 Solutions, Aether Systems and Openwave Systems are three such names.
Maryland-based Aether Systems Inc. develops wireless data systems that enable mobile data communications and real-time transactions on handheld devices. The firm has some customers in the financial services industry, including Charles Schwab Corp. {SCH} and E*Trade Group Inc. {EGRP}.
Aether is best known for its success in corporate and enterprise markets where it has won business from firms and organizations such as the U.S. Postal Service, and delivery operations such as Southeastern Freight and Golden Eagle Express.
“Aether’s share price has declined precipitously recently due to the tech sector downturn and pessimism about wireless data adoption rates,” says Prabhas Panigrahi, an analyst at Dresdner, Kleinwort Wasserstein, based in New York, in a recent research note.
Panigrahi notes, however, that Aether still had $732 million in cash and cash equivalents on hand as of the conclusion of the first quarter, ended March 31, when the company posted slightly lower than expected losses on slightly higher than forecast revenues.
“We believe Aether, with its market and technology leadership, presents an attractive risk-reward opportunity at today’s prices,” he says.
Openwave Systems Inc., based in Redwood City, Calif., is the leading vendor of Internet-based software infrastructure to major wireless carriers, having captured 70 percent market share of the early test, or “beta” deployments, according to a Merrill Lynch report published on June 5.
“Margin expansion [at Openwave] should drive earnings growth well in excess of revenue growth,” writes Merrill Lynch analyst Virginia Genereux. “Our aggressive case model has fifty percent revenue growth through calendar year 2004 and 75 percent earnings per share annual gains.”
As of the end of 2000, Openwave had cash, cash equivalents and short-term investments of $435 million on hand, excluding $20.7 million set aside as restricted cash.
Toronto-based 724 Solutions likewise specializes in a potentially lucrative niche by providing wireless application software primarily to the banking and securities industries. The firm’s early customers include Citigroup Inc. {C}, Wells Fargo & Company {WFC}, Wachovia Corp. {WB}, and the Bank of Montreal {BMO}. Major owners include its customer, Citigroup, which owns almost 10 percent of the firm, and Bank of America Corp. {BAC}, which owns more than six percent.
As of March 31, 2001, the company’s cash, cash equivalents and short-term investments totaled $168.3 million, $1.7 million more than it had on hand at the end of the previous quarter.
And 724 Solutions was one of last year’s IPO all-stars, rocketing up more than 175 percent on its first day of trading on January 27, 2000. The stock quickly climbed to over $240 a share in a rise that was boosted, in part, by positive sentiments growing out of the firm’s close ties to the banking industry.
“Being close to the banks is something that will prove very beneficial,” Mark Quigley, an analyst with Ontario-based Yankee Group, said at the time the firm went public. “Establishing a reputation in association with the banks will be an advantage as they transfer the technology to other vertical markets.”
The same is true now, say the analysts. What’s different, however, is that investors who believe in the future of the wireless sector can now buy some of the most respected early software leaders at prices that are far more attractive than they were last year.
“The Nasdaq decline impacted these stocks and people have a lot of uncertainty these days talking about things we can’t see and do right now,” says Vyas, of industry analysis firm IDC. “But these three really are the leaders in the space. Each of them has a pretty sound market they are focused on.”
But before investors race off to buy those stocks they should also be aware that current analyst comments probably won’t mean a lot to value investors and those managing value funds, who typically like to see predictable earnings before they invest. Likewise, it’s always possible that other strong competitors may yet emerge to take business away from the early leaders.
Nonetheless, the experts say that these three stocks look attractive for investors who don’t mind taking on some risks in hopes of getting ahead of the pack.
