From THE BULL MARKET WIRELESS INVESTOR,
Saturday, January 15, 2000
FROM The Bull Market Wireless Investor - bull-market.com
THE BULL MARKET WIRELESS INVESTOR, Saturday, January 15,2000
Volume 2, #2
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COMMENTARY
While the blockbuster AOL Time Warner deal is hogging the media spotlight, we're going to start our
review of specific industry segments in the wireless industry with the Competitive Local Exchange
Carriers (CLECs) where one of our favorite companies, Nextlink (NXLK), is also making merger
headlines with its $2.9 billion acquisition of DSL provider
Concentric Networks (CNCX) (see story below).
As many of you know, CLECs compete with the Regional Bell Operating Companies (RBOCs) by
offering local, long distance, data, and Internet access to end users using fixed wireless. With a modern
infrastructure and lower operating costs than RBOCs, CLECs have caught Wall Street's eye
enough to send the overall group soaring up 150% in 1999. Despite good stock market gains though,
CLECs have been more promise than reality though, as they have not made too much actual progress
against the incumbent RBOCs. However, the year 2000, the year when content will inally hit the
broadband pipes, should firmly put the CLECs at the orefront of the data communications revolution.
Here's why.
CLECs are in a sweet spot of the communications revolution for two reasons. One, what they sell,
bandwidth to the end user, is in high demand as Internet traffic growth is still multiplying exponentially
--some say it doubles every 100 days. Two, their primary competition is the RBOCs who have been
weaned on monopoly profits which they refuse to
cannibalize as today's market demands. With revenue increasing from both Internet growth and from
market share gained from RBOCs, successful CLECs can realistically attain 5 year revenue growth
exceeding 50% per year
(market research firm IDC forecasts that the U.S. market for services delivered via fixed wireless
technologies will balloon from $767 million in 1999 to $7.4 billion by 2003). With this type of growth
possible,
there is still significant upside potential available for the right CLEC.
Here's what to look for with CLECs in 2000. First and foremost, look for the market turning to single
source vendors for local, long distance, and Internet data services. This will lead to increased market
penetration
for CLECs which, hopefully, will result in actual earnings. CLECs have a proven revenue model and,
with actual earnings, the valuation methodology will change from multiples of revenue to multiples of
earnings (you
gotta have "E" to have a PE ratio). If business penetration levels increase to the 9-11% level that we
expect in 2000, and Internet data traffic
continues its exponential rise, we expect to see the more successful CLECs sporting some pretty high
forward PE ratios with rising earnings multiples. They'll be deserving of it.
Second, look for consolidation with local Internet Service Providers (already, the lines between and ISP
and a CLEC are rather fuzzy) and partnerships with other CLECs and backbone carriers. Given the
valuable last mile links provided by many CLECs, they may be attractive acquisition candidates for many
of the backbone carriers as well as other CLECs
seeking a national footprint.
Risks for CLECs are essentially management ones. While some CLECs seem to be taking a "build it and
they will come" approach, we think more is needed. For the masses to cut their ties with the comfortable
old RBOCs, both a sales force and good customer service and back office support
are needed. Financing issues and cost controls on infrastructure build-out are also key. However, in
general, these risks are company specific risks, not industry wide ones.
As you know, we think the best bets in this space are Nextlink (NXLK, $85) and Winstar (WCII, $79).
Nextlink, headed by wireless pioneer Craig McCaw, is the Blue Chip CLEC as it offers a variety of
wireless and fiber echnologies and has entered into some great alliances with other telecom companies.
Winstar has accumulated a huge inventory of wireless broadband capacity in the 38GHz spectrum. If
38GHz spectrum becomes the wireless
broadband vehicle of choice which we think it will, Winstar wins big.
While not in our portfolio, for those interested in a pure play in up spectrum wireless, Teligent (TGNT,
$66) is well worth a look.
While management performance will be critical, a CLEC with a good sales force and back office should
be able to offer better services than most RBOCs at roughly 2/3 the price. Pretty nifty trick. One well
worth investing in.
Visit bull-market.com for a full listing of our wireless portfolio and to review
past issues of The Bull Market Wireless Investor. Thanks to all who have sent emails with comments and
suggestions. We will attempt to address many of them in future newsletters. We apologize for not being
able to respond to all the
emails that you have sent, but we read them all and many we act on.
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IN THIS ISSUE
1. NEXTLINK TO BUY CONCENTRIC FOR $2.9 BILLION
2. QUALCOMM, HITACHI ENTER HDR ALLIANCE
3. GLOBALSTAR TO SELL 7 MILLION SHARES
4. VODAFONE TO START GLOBAL MOBILE INTERNET SERVICE
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1. NEXTLINK TO BUY CONCENTRIC FOR $2.9 BILLION
Nextlink Communications has agreed to buy Concentric Network Corp. (CNCX $37) for $2.9 billion in
stock, to add Internet services for business customers. Nextlink will pay $45, or about 0.57 shares for
each Concentric share, a 50% premium based on last Friday's closing price.
Concentric will give Nextlink Internet access and Web-site management services for small- and
mid-sized businesses. The acquisition is expected to close before June 30, 2000.
COMMENT: We like it. As mentioned above, the lines between CLECs and Internet Service Providers
(ISPs) are blurring quickly. This acquisition will give Nextlink increased ability to provide data service to
its small and irdium-sized customers and will free Concentric from paying
backbone carriers to carry its data traffic. We love Nextlink and, for those willing to take the merger
risk, we suggest getting Nextlink at a discount by buying Concentric.
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2. QUALCOMM, HITACHI ENTER HDR ALLIANCE
Hitachi Ltd., Japan's largest electronics maker, has entered an agreement to help Qualcomm (QCOM,
$141) commercialize its new data communications equipment known as High Data Rate (HDR) system.
Hitachi will this year spend $95 million to upgrade a production line to make parts and relay
stations used for the technology. HDR can accommodate three times the number of users than a new
type of mobile phone system that NTT DoCoMo and others plan to unveil next year, the report said.
COMMENT: This is BIG news for Qualcomm as Hitachi is the first vendor to commit to its HDR
technology even though it will not impact Qualcomm's near term performance because it won't be
available until next year.
The potential of HDR is yet another reason why we think Qualcomm should be a core holding in any
wireless portfolio.
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3. GLOBALSTAR TO SELL 7 MILLION SHARES
Globalstar Telecommunications Ltd. (GSTRF $35, down 2) said it plans to sell 7 million shares of
common stock to help finance its satellite-telephone network. Globalstar should raise about $250 million
from the sale and plans to use proceeds from the stock sale for capital
spending and marketing. Globalstar has 82 million shares outstanding.
COMMENT: While secondary offerings can often hold back a stock, we can't blame Globalstar for
striking while the iron is hot. Globalstar is admittedly a speculative story, but the misinformation and
outright factual errors concerning Globalstar's system and target markets being
bandied about on CNBC and the like make us very happy contrarians here. As soon as the early
subscriber numbers start coming in, we think this stock will soar.
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4. VODAFONE TO START GLOBAL MOBILE INTERNET SERVICE
Vodafone AirTouch (VOD, $53) plans to create a global Internet access
service for cellular phones. The mobile phone giant announced that it
will provide a service that mimics what America Online sells to
personal
computer users. Partners include such technology luminaries as Sun
Microsystems, IBM, Psion Plc, Nokia, and Charles Schwab. Vodafone said
the new services will boost revenue per subscriber by as much as 25
percent in fiscal 2004.
COMMENT: Absolutely brilliant move by Vodafone. This is the type of
service that can only be brought out by a large multinational carrier.
This should also help Vodafone in its takeover battle for Mannesmann as
it
shows that Vodafone is building a truly global business while
Mannesmann
is just a large regional player. While we think that Vodafone's
near-term
price will remain rather stagnant until the Mannesmann takeover issue
is
resolved, we absolutely love the long-term prospects of this powerhouse
company.
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If you have any comments or questions, please send email to Chalmers
Poston at WirelessInvestor@Bull-Market.com
Chalmers Poston
Senior Contributing Editor
The Wireless Investor
Todd Shaver
Editor in Chief
The Bull Market Report
Washington, DC USA
Chalmers holds degrees from UNC-Chapel Hill, the University of South
Carolina School of Law and from Georgetown University. He has been
involved in ventures in many industries and is currently involved in a
small business startup using a wireless device to outsource medical
billings.
Todd Shaver is the Editor in Chief of The Bull Market Report and The
Bull
Market Wireless Investor.
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**** DISCLAIMER ****
The Bull Market Wireless Investor is not a registered Investment
Adviser
or a Broker/Dealer. Readers are advised that the report is issued
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or the solicitation of an offer to buy. The opinions and analyses
included herein are based from sources believed to be reliable and
written
in good faith, but no representation or warranty, expressed or implied
is
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Bull Market Report and The Bull Market Wireless Investor may or may not
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(C) Copyright 2000 The Wireless Investor and The Bull Market Report,
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