From MSN article : Here's my pitch for Superconductor Technologies (SCON), which I discovered (and then personally purchased) after screening for micro-cap New High Screamers last month:
Wireless service providers worldwide are scrambling to add more capacity to their networks. It's one thing for Nokia (NOK) and VoiceStream Wireless (VSTR) to sell more phones and service contracts to consumers with their sexy marketing campaigns, but it's another thing actually to accommodate the surging number of calls being made. Each wireless base station -- which, broadly speaking, are poles with switches at the bottom and antennae at the top -- can only handle a certain number of calls at a time. After that limit, calls get dropped, static rises or customers can't get through.
If you want to use your digital or PCS cell phone to receive information from the Internet, your connection had better be rock-solid. Until recently, connection quality didn't matter too much; if your friend's voice drops out for a second during a call, no big deal. But drop a couple of bits from an e-mail message or spreadsheet, and your communication blows up. Game over.
The more we use our wireless devices for broadband communications -- particularly in systems based on the CDMA standard from Qualcomm -- the more power we are likely to want to draw. Power-intensive applications drain battery life from receivers (your handset) and are more costly at the transmitting end (the service provider's base station).
Filters made from superconductors -- super-cooled materials, first developed commercially a decade ago, that offer virtually no electrical resistance -- solve all three problems: Service providers report that they cut distortion and noise dramatically, boosting the capacity of some base stations by as much as 50%. This means service providers will have far fewer "dead spots" in their networks, and can keep more customers online longer -- sharply boosting revenue. Because signals are more highly linear, or clear, it's less likely that bits will be dropped in data communications. And furthermore, well-filtered transmissions require less power to transmit -- prolonging battery life for handset users and cutting costs for transmitters.
Until about nine months ago, the superconducting industry was about in the same place as development-stage biotechnology companies: all research, no products. But all of a sudden, wireless service providers are moving from trials to installation -- and many observers believe that sales at the industry's leaders are rumbling on the launch pad, ready for blast-off.
How big is the market? A brokerage analyst recently reported that there were 200,000 base stations worldwide at the end of 1998, but estimated the number would hit 1.1 million by 2003. According to M. Peter Thomas, chief executive at Superconductor Technologies, about half of those stations could benefit from the installation of a superconducting filter -- each of which today costs $15,000 to $30,000. They're easy to install, too -- you simply attach the breadbox-sized device on a rack between the antenna and the current RF receiver with standard cables, sort of like fitting a new screen into an empty window frame.
Superconductor Technologies, which boasts Intel (INTC) founder Robert Noyce as one of its own founders back in 1988, has nearly 60 superconducting patents to its credit, and currently gets the bulk of its revenue from filtering research it performs for the U.S. Defense Department (filters are pretty important in aircraft and satellite transmissions). But Thomas, a veteran of Ericsson (ERICY) and Nortel Networks (NT), said the firm recently has boosted its production capacity at its Santa Barbara, Calif., plant by 600%, and can expand further if and when demand warrants. Current customers include most of the top 10 wireless carriers in the country.
Trailing 12-month revenues on the commercial side of the company are about $2.9 million. Thomas expects revenue growth of "several hundred percent" over the next two years if all goes well, and if you consider the potential size of the market, that makes sense: Multiply an average of $20,000 per box by the potential to sell into 500,000 base stations. That's a $10 billion market. If Superconductor Technologies only gets 10% of that, it's a $1 billion revenue opportunity. Cut it in half, and you can still see the potential for $500 million in sales over the next five years. Cut the average selling price in half, and $250 million is still a big sales target for the company. Now imagine what happens if it gets more than a 10% share, or expands its product line. Thomas said he expects to reach profitability by the first quarter of next year.
Some pretty smart investors already have done the math and have quietly purchased significant stakes. Hillman Co., a well-respected private holding company associated with Pittsburgh billionaire Henry Hillman, has bought a 40% stake in the firm over the past couple of years via its Wilmington Securities venture-capital arm. Tredegar Investments, the venture-capital arm of Virginia-based Tredegar Corp. (TG), and Seattle-based Madrona Investments each bought significant stakes back in the summer via a preferred stock offering. And the State of Wisconsin Investment Board, one of the nation's largest and most-influential pension funds, announced it purchased nearly 20% of the firm via a new stock offering just last week.
Adding up all the common stock, Thomas said the company has 12.7 million shares outstanding. Trading at $12.50 on Tuesday, that puts it at a $161.2 million market cap, so it will need to trade at a $16 billion market cap one day to reach the 10,000% level. "That's conceivable," says Eric Bell, a vice president at Tredegar's Seattle office. "The high-speed wireless switching opportunities that superconductors make possible is something wireless carriers are just going to have to move to. This is still very much an early-stage company, which is why we liked it; it's in one of our venture-capital funds. We think it's one of those companies that probably went public too early -- so you could say that it presents an opportunity for private investors to make a VC-type investment in a public stock."
Competitors include Conductus (CDTS) of Sunnyvale, Calif., and Illinois Superconductor (ISCO), of Mt. Prospect, Ill. If demand turns out to be even a fraction of what's expected today, you could probably take the approach articulated in Geoffrey Moore's book "The Gorilla Game" and buy shares in all three until the market sorts out which is best, then pile into the leader. Just don't expect revenues and earnings to explode at once; this is an idea that could take a year or more to get started.
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