moneycentral.msn.com
---snip, snip ---
Speaking of wireless and filters, I have a new idea for our portfolio of stocks
that potentially could advance 10,000% over a 10-year period. The company
makes, well, wireless filters.
Big deal? Actually, yes -- it could be huge. 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. |
