Is It Time To Hang Up On Investments In Wireless?

During the go-go days of the late 90s, capital was cheap and wireless service providers invested with heavily amid ever increasing projections for wireless subscribers. Then the bottom fell off. Brutal cost competition and the resultant client churn took a heavy toll on operative margins as the DJ Wireless index swooned over 90% from March 2000 to Gregorian calendar month 2002. The industry has been effort its act together on the valuation front for several time. Client churn rates have moderated. Capital expenditure has been reined in and operative margins have expanded. Low interest rates have enabled debt-laden companies to strengthen their balance sheets. Nextel Communications (NDQ: NXTL), for example, has been able to slash its business enterprise obligation by a large $5 billion. The improvement in the operative performance of the wireless technology companies has attracted significant capitalist attention. Fidelity Choice Wireless (NDQ: FWRLX), a mutual fund that concentrates its investments in this sector, has doubled its net plus value since the end of 2002.The obvious question for investors: Is it time to hang up?

We review drivers from an investment perspective to articulate our thoughts on wherever the wireless sector is headed.

Subscriber Growth in Emerging Markets.

With wire-line property in emerging markets such as China, India, and Russia being low on a per capita basis, wireless technology offers a low cost means for the world in these counties to get connected spell avoiding investments in wire-line infrastructure. With year-over-year revenues and earnings ramping at over 75%, shares of Russian wireless service providers, like Mobile Telesystems (NYSE: MBT) and Vimpel Communications (NYE: VIP) have each soared over 140% in the past 52 weeks. The number of subscribers is obscurity close to saturation yet; as such, we believe there is further room for significant growth in wireless subscribers in these countries. Looking ahead to the 2005-10 time-frame, subscriber growth rate in China is calculable to average 12% annually, a rate nearly 3 times that in mature markets. Such large increases in the subscriber base requires significant investment in wireless infrastructure and companies like Qualcomm (NDQ: QCOM) and LM Ericsson (NDQ: ERICY) stand to be continuing beneficiaries of this capital spending. QCOM for example, shipped 32 million phone chips in 1Q2004, a record number, and same demand wish increase in 2Q2004 quarter, forcing the institution to consider adding creation capacity. Shares of QCOM and ERICY have vainglorious over 100% and 200%, severally in the past 52 weeks.

Revenue Sweetening Opportunities in Mature Markets.

Subscriber growth in mature markets such as those in the U.S. has ticked up thanks to new phone features like integrated cameras as well as regulations like telephone number portability. We view this acceleration as much of a temporary phenomenon. Longer-term, growth in number of subscribers wish decline from current rates as we approach saturation levels. Meanwhile, the nation-wide roll-out of telephone number movability slated for end May wish likewise support wireless operators on their toes in providing quality services to minimize churn.

Although subscriber growth wish eventually slow, growth opportunities from a revenue stand-point continue to be bumper as revenue per client stands to grow from new high-speed wireless data, wireless Net access (or Wi-Fi), and wireless information services. Wireless data services and data revenue are forecasted to grow at double digit rates in the years ahead. Looking out to 2006-08, Wi-Max, a new form of high-speed, longer reach wireless networking and Mobile-Fi, the extension of Wi-Fi to moving vehicles, are likely to gain widespread use.

Wireless service providers wish have to invest in 3G wireless networking services to go after wireless data service opportunities. 3G wireless networking improves the quality of wireless service spell adding a data delivery component. This augurs well not only for well-capitalized wireless service providers like Vodafone (NYSE: VOD) but likewise for wireless instrumentality providers like ERICY and Alcatel (NYSE: ALA) as 3G network preparation gains traction in 2005. Research in Motion (NDQ: RIMM), the leading player in wireless messaging, courtesy its Blackberry, is likewise well positioned for this opportunity.

Fickle Telephone Customers.

Sales of telephone units are forecasted to grow 10% in 2004 from 2003 levels. New features such as color displays, integrated cameras, short-messaging, and web access capability have driven a strong telephone replacement cycle in mature markets spell a growing subscriber base continues to spur telephone demand in emerging markets. Spell the total pie has been growing, Nokia (NYSE: NOK), the worldwide telephone leader has been at the losing end of the market share game for several time as its handsets have not stricken a chord with consumers. Else telephone manufacturers like Motorola (NYSE: MOT), South Peninsula based Samsung Physical science (005930.KS), and SonyEricsson, the London based 50/50 joint venture between Sony and Ericsson, appear to be beneficiaries of NOK's market share decline.

Value Production through Consolidation.

The pressures from a declining long-distance business as well as economies of scale in the wireless service business do acquisition of wireless assets attractive for major telecommunication service providers as well as wireless service providers. Wireless represents a growth possibleness for the embattled telecommunication service providers facing the strong headwinds of a declining long distance business. Earlier this year, once AT&T Wireless (NYSE: AWE) put itself up for sale, purchasing interest was keen from several major telecommunication carriers as well as wireless service providers. Eventually Cingular, the SBC Communications-Bell South joint venture, was the winning bidder at a cost tag of $1,850 per AWE customer. With Cingular leapfrogging to become the nation's largest wireless service provider, we think there is much to move by way of consolidation.

Sprint (NYSE: FON) has recently recombined its 'tracking stocks' FON and PCS possibly creation this institution a part of consolidation plays. So too are niche wireless providers like U. S. Cellular (ASE: USM). NXTL and Verizon Communications (NYSE: VZ) may likewise be participants in this industry's consolidation efforts.

In closing, we think the easy money in this sector has been ready-made and share prices in this sector may consolidate for several time. That said, the opportunities for growth in this industry continue to remain attractive and any pull-back wish likely be a purchasing opportunity. At this juncture, we favor wireless infrastructure provider, QCOM. Telephone maker, MOT that appears to be on the mend, has adscititious attraction as a restructuring play. Among wireless service providers, we favor NXTL for its strong-hold over construction and manufacturing businesses. Investments in wireless service providers have additional appeal for their potential to create value through consolidation. All said, spell the rate of capital appreciation wish likely be slower going forward, we believe there are several forces at play here which wish likely modify this sector to beat out broader averages like the unmanaged Wilshire 5000 Total Market Index.

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Dr. Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the discerning ValuM™ Investment Process for managing investments. He edits and publishes the AlphaProfit Sector Investors' Newsletter™ that discusses investments in Fidelity sector funds. To discover much just about AlphaProfit and to subscribe to the free newsletter, visit: http://www.alphaprofit.com