Powerwave: The Next JDS Uniphase In The Making?
investorlinks.com
March 17, 2000
Powerwave Technologies is a hot wireless communications infrastructure components stock. It has had a big run-up but has cooled down over the past few days along with the whole tech market. Around 25% off its high, Powerwave is still expensive. But not expensive on hype alone - Powerwave is a solid company with a commanding position in a hot market. It has a real chance to make today's high valuation look pretty reasonable in the future. With outsourcing being the trend amongst its customers, Powerwave may become a consolidator of wireless components supply - similar to what JDS Uniphase is doing in optical components and modules.
Powerwave Technologies Inc. (NASDAQ: PWAV) has emerged as the very strong leader amongst independent radio frequency (RF) power amplifier vendors. Spectrian Corporation (NASDAQ: SPCT) is still hanging on, with possibilities for a turnaround. Microwave Power Devices Inc. (NASDAQ: MPDI) and AML Communications Inc. (NASDAQ: AMLJ) have been beaten up to the point that they are no longer in the fight.
These RF power amplifiers are essential for the wireless communications industry where network operators such as AT&T Wireless, are having to expand capacity and upgrade their networks to meet booming demand from cellphones, wireless data and wireless Internet.
If you want the leader in this competitive space, Powerwave is the pick, and has enough going for it that long-term share price appreciation from a base area of around $150 can be rationally argued. Powerwave is growing very rapidly. Its revenues increased by 292% in the fiscal year ended December 31, 1999 and the company is profitable.
Like all hot wireless communications related companies, Powerwave's stock has skyrocketed. The March 15 close of $160.5 is down from a 52-week high of $205 on March 10 - the result of an extremely fast run-up and recent declines in the overall tech market. The 52-week low is $21 5/8.
Spectrian, too, is well off its 52-week high of $36 5/8 but far above the $8 1/8 low. At the close March 15, its stock was $24 3/16. In this case, the movement has been a result of turnaround efforts producing sooner than expected results, then a big order delay producing an earnings warning for the company's Q4 ending March 31. Spectrian is by no means dead in the water - it was able to secure eight new field trial agreements at the Cellular Telecommunications Industry Association Wireless 2000 show in early March.
Spectrian's Q4 results, as warned, will be below expectations. Current market conditions are such that a positive indication on future earnings trends, or strong revenues growth, is likely to send its stock strongly upwards. Although field trials do not necessarily translate into sales, being competitive enough to get them for its new multi-carrier products is a sign that the future will not be as bad as Q4.
As long as wireless communications related stocks retain their red hot status, Spectrian's share price is likely to be rewarded simply for staying profitable and meeting (revised) expectations - which Spectrian looks able to do over the full year. Without the hot market, Spectrian still has value - but value without momentum does not count for much these days.
Microwave Power Devices and AML Communications are also well off their 52-week highs, and strongly above their 52-week lows. Unfortunately, these two companies are best avoided as they have slipped into uncompetitive positions from which recovery will be extremely difficult.
A booming wireless communications market has led to surging demand for wireless network infrastructure equipment vendors. OEMs such as Nortel (NYSE: NT), (TSE: NT), Lucent (NYSE: LU), Ericsson (NASDAQ: ERICY) and Nokia (NYSE: NOK) supply this equipment to wireless network operators such as AT&T (NYSE: T). Components vendors such as Powerwave and Spectrian, supply the OEMs with the components, like RF amplifiers, that go into making the infrastructure equipment.
Powerwave is certainly pricier than it was only a short while ago, but it does have potential to move higher. The situation is similar to that facing JDS Uniphase (NASDAQ: JDSU), (TSE: JDU) in optical components and modules: excess demand for the right product line-up.
In the case of wireless, current strong overall demand is forecast to strengthen even further as 3G is adopted as a worldwide wireless network standard, and Wireless Application Protocol (WAP) is adopted as the single standard protocol for wireless Internet access.
The adoption of 3G will have a positive impact on wireless demand through eliminating TDMA, CDMA, and GSM network distinctions. With the three major digital wireless technologies all morphing into 3G networks, and WAP adoption a foregone conclusion, the framework allowing true seamless worldwide voice and data communications will be in place.
For Powerwave and Spectrian, the evolution towards 3G creates opportunity because it is RF power amplifier hungry. The network upgrades moving to 3G will create more component demand for the companies.
Essentially, the better the RF amplifier component, the better the wireless base station. The better the wireless base station, the better the infrastructure equipment. The better the infrastructure equipment, the better the efficiency, the higher the service level and the lower the operating costs of the wireless network operator. Which are things the operator wants to have as wireless usage increases.
All this has led to consensus RF power amplifier market growth forecasts through 2003 of 20-25% per year, from an actual 1999 figure of $1.5 billion. Powerwave is best positioned to take the bulk of this component specific demand. Having the right products at the right time has enabled it to make strong market share gains and diversify its customer base to a greater extent than its competitors. For example, Powerwave has pretty well knocked Spectrian out of future business with Nortel. Rather important when Nortel is Spectrian's biggest customer.
With technology good enough to knock its main competitor out of lucrative future Nortel business, "With technology good enough to knock its main competitor out of lucrative future Nortel business, Powerwave seems poised for significant contract wins."
Powerwave seems poised for significant contract wins. Especially since wireless components sales cycles are so long - often a year or more. With Spectrian being said to have delayed Nortel related product development, it looks like Powerwave will have a lonely few sales cycles. At the same time, Nortel will represent less of Powerwave's revenues than it did for Spectrian.
Further evidence of Powerwave's market share gain is the substantial revenues and earnings gap that has been opened-up over the competition. Trailing-twelve-month revenues, operating and net income for Powerwave, Spectrian, Microwave Power Devices and AML Communications are:
(millions)
Revenues: $292.5, $144.5, $70.8, $7.2 respectively
Operating Income: $28.7, $(20.8), $(3.8), $(3.2) respectively
Net Income: $20.3, $(17.7), $(2.9), $(2.9) respectively
There is also a huge market capitalization range amongst the companies:
(millions, March 15)
Market Capitalization: $3,235; $259; $105; $49 respectively
As well as having higher absolute numbers, Powerwave's revenues are growing at a faster rate. The higher top-line numbers and faster growth rate are important because these companies face strong price pressure from their customers. The Powerwaves and Spectrians of the world are not powerful enough to argue price with the Lucents, Nortels or Ericssons. The only thing for such component suppliers is to go for the best operating efficiency and highest revenues possible. Powerwave is winning this battle.
Soon Powerwave may reach the point where it is simply too big for Spectrian to be a competitive problem. Microwave Power Devices and AML Communications are already effectively out of the race to be market leader.
Powerwave's revenues and earnings advantage, and its much higher market capitalization, give it superior flexibility for funding future growth - the company has a far greater ability to grow through acquisitions. This factor may become very significant for two reasons: Powerwave could choose to act as a consolidator of independent wireless infrastructure equipment components vendors, or, it might be the only independent RF amplifier vendor with the financial means to acquire the in-house amplifier manufacturing units of the big OEMs.
Powerwave has already made an acquisition from a larger player, Hewlett-Packard (NYSE: HWP), looking to divest itself of its RF amplifier business.
The first path would set Powerwave on a JDS Uniphase like course - domination of components supply. The second path would create Powerwave economies of scale that would be very hard for any competitor to overcome.
Since the trend amongst the OEMs is towards increased outsourcing of RF amplifier supply, rather than in-house manufacturing, Powerwave is strongly situated with regards to solidifying its position as market leader.
While it has run hard and fast, Powerwave's share price has taken a significant breather: on March 15 it was 22% off its high. Market capitalization to sales at March 15 was 11:1, while P/E was 159. Compare this to 1.8:1 market capitalization and trailing losses for turnaround play Spectrian. But Powerwave is in a better position to produce revenues growth matching the 20-25% consensus RF power amplifier growth forecast over the next few years.
"If (Powerwave) is able to consolidate components or amplifier supply, it should very strongly outperform the general forecast."
If Powerwave is able to further solidify its leadership position, it should do better than simply match the general growth forecast. If (Powerwave) is able to consolidate components or amplifier supply, it should very strongly outperform the general forecast. In both cases multiples would come down to comparatively reasonable levels even with strong share price gains.
As Powerwave's share price movement since March 10 has shown, stocks with fast run-ups on future expectations are not the best at weathering market downturns. But there is enough real worth in Powerwave that it could very well turn out to be the next JDS Uniphase. |
