As a long-term investor, Betty Taylor tries to avoid compulsively second-guessing the stock picks she makes, or fantasizing about those she missed.
But she’s still kicking herself over Nokia.
In June 1998, while attending an investment symposium in Helsinki, Finland, the Overland Park, Kan., resident and her husband toured the headquarters of Nokia Corp., the world’s largest manufacturer of mobile phones.
“It was very impressive. One of the ladies we were with immediately called home and bought shares in the company,” Taylor said. “We considered it too. We just didn’t do it.”
Since then, Nokia’s shares have rocketed from about $30 to more than $200 in about 19 months.
That sounds like a jackpot, but it’s hardly exceptional. Last year, the three best-performing stocks in the Standard & Poor’s index were wireless companies: Qualcomm, whose outsized gains have made it a familiar name, was up 2,619 percent. Nextel surged 337 percent. And Sprint PCS raced ahead 343 percent.
Among 51 stocks listed on the Bloomberg News’ cellular telecom index, the average issue had a total return in the past 12 months of 191 percent.
Which raises the question: Is the bonanza over, or will the wireless bull keep running?
Most experts think it’s unlikely the sector will generate the astral returns of the last year again in 2000.
But analysts point to a variety of factors that supported wireless stocks in 1999–robust subscriber growth, buoyant revenue per subscriber, mergers and the growth of wireless data services–and say the same forces will be at work this year and beyond.
“There’s still plenty of money to be made in this sector,” said Samuel May, an analyst with U.S. Bancorp Piper Jaffray.
The basic pitch from Wall Street pundits seems intuitively correct. The industry’s growth rate should outpace the overall world economy for years to come as mobile devices become more enmeshed in business and society everywhere.
There is also widespread consensus on the following:
– Most voice traffic will eventually travel on wireless networks as people use wireless phones for their primary phone and traditional wired connections for data.
– Wireless networks, which are cheaper to deploy and upgrade than fiber optics, will be the technology of choice in rural areas of the United States and developing countries. China has only 40 million wireless subscribers today, and a population of 1.3 billion.
– The Internet and e-commerce will go mobile, creating new revenue streams for wireless service providers, manufacturers of handsets, infrastructure providers and countless smaller companies that supply components and software to make wireless data possible.
– The industry’s consolidation will continue. Smaller players will be absorbed in takeovers as companies seek larger coverage footprints and better technologies.
“We’re in the beginning of a transition,” said Jeffrey Kagan, an independent telecommunications analyst based in Atlanta. “We haven’t even scratched the surface yet in terms of the growth in this industry.”
Still, the wireless sector is not for the fainthearted. These are real companies with explosive revenues and, occasionally, real earnings.
But the valuations, by traditional measures at least, are stratospheric. Some experts think the speculative bubble may be deflating, with Wall Street shying away from concept stocks and moving toward those with quantifiable results to fall back on.
The stage is still set for wireless to become part of the new economy, analysts say, but the time when investors could buy wireless stocks like Internet issues–on blind faith alone–may be ending.
“You can still outperform the market in this sector,” said Brian Belski, chief investment strategist for George K. Baum & Co. “But you need to roll up your sleeves and do some research.”
The move from analog to digital technology revolutionized the wireless industry and spawned unprecedented growth. Almost one-third of the U.S. population now owns a wireless phone, according to research from the Yankee Group.
That’s considered low in comparison with Western Europe’s 40 percent, but it is up from 12.2 percent in 1995 and is expected to hit 51 percent by 2008.
The fastest-growing service provider in the country is Sprint PCS, which has gone from startup to household name in little more than four years. Analysts estimate that after a booming fourth quarter, the company now has nearly 6 million customers, and they think it could add another 3.2 million subscribers next year.
Sprint issued a new stock to track the performance of the business in November 1998. Tracking stocks are supposed to reflect the financial results of a firm, while conferring limited ownership rights in the underlying assets.
Since the shares were issued, Sprint PCS has soared from 15 to more than 100. The resulting windfall for shareholders has spawned tracking-stock envy among competitors.
AT&T hopes to raise as much as $10 billion this spring by issuing a tracking stock for its wireless business. If successful, analysts think SBC Communications and Bell Atlantic won’t be far behind.
Establishing a fair valuation in this market is more art than science. Many analysts say there’s no such thing as a fair value, and by traditional measures that’s true. Many of the carriers are still losing buckets of money as they build networks and acquire customers.
But common performance measures include subscriber growth, customer churn rates and average monthly revenue per subscriber.
To set target prices and compare valuations, analysts also compare the multiples of revenue and cash flow, or divide a carrier’s market capitalization by the population covered by its licenses, which gives a price per potential subscriber.
Analysts also stress that with the overall growth in the market, even the slow-growing carriers look good.
“This isn’t a zero sum game,” said Glenn Fogle, a portfolio manager for American Century Investments in Kansas City. “The industry is growing at 20 to 25 percent a year. Everybody can grow.”
Share prices also are being supported by industry consolidation, which accelerated last year. According to Linda Mutschler at Merrill Lynch, that trend will continue as national players continue to fill in their coverage areas and introduce one-rate pricing plans that bill roaming and long-distance at local rates. She thinks consolidation could also go global.
Five national players are currently emerging: Sprint PCS, AT&T, Nextel, Vodafone/Bell Atlantic and Voicestream/Omnipoint/Aerial.
The best acquisition bets, analysts say, are more rural players, including Western Wireless, Alltel, Century Telephone, Powertel and companies that act as affiliates for large providers like Sprint PCS and AT&T.
Wireless data is widely touted as the next big thing in wireless, and it is likely to be a far more visible factor for investors in coming years.
Data offers carriers an opportunity not only to differentiate their service in an increasingly commoditized business, but to drive customers to use larger buckets of minutes and collect fees on mobile e-commerce transactions.
But not all networks are created equal. As carriers migrate to new technologies that can transmit data at extremely high speeds, operators like AT&T face major upgrades to their networks to keep pace with the capacity and speed of competitors’ networks.
