REDIALING PHONE.COM
Kenneth A. Toudouze, CFA
Related Stories: streetadvisor.com
In response to e-mail from our readers and the release of last week's
numbers, we've decided it is time to re-evaluate wireless Internet enabler
Phone.com (PHCM, $73, up 8). Based on the valuation table below, our new
fair value target is $71. But first, a clarification.
We may have initially picked the wrong time to jump into the stock, but we
have remained bullish on the company and its future prospects since we
began covering the stock in early February. The valuation reality check
posted last week was not a Sell recommendation; it was merely an
explanation of the risks associated with the stock. Many earnings-free
stocks that had high expectations built into their stock price have been
punished over the past several weeks. Phone.com is no exception.
We are unaware of a market measurement for investor psychology that
consistently and accurately predicts changes in sentiment. Phone.com gets
swept up in the technology tide on both the upside and downside. To those
investors who have actively traded this stock and made profits for the
past month, kudos.
See Chart: streetadvisor.com
The mood surrounding Internet-related companies is changing -- and a clear
dichotomy is emerging between winners and losers. WE continue to believe
that, unlike many other companies, Phone.com has the potential to live up
to higher expectations. Its recent quarterly earnings release supports
that thesis. What is most impressive about the numbers is the gross
margin. As revenues surged, costs fell. Margins reached 74%, outpacing
estimates of about 65%. We expect margins to hold in the high 60s or low
70s as revenues continue to climb, and this gives us confidence that
operating margins will also move higher.
Phone.com's active subscriber base also showed incredible growth, topping
2 million and easily exceeding the 1 million forecast. The company also
expanded its carrier relationships, boosting the level of potential
subscribers to 200 million worldwide. As mentioned in our conference call
note last week, recent carrier additions include British Telcom (BTY) and
Vodafone Airtouch (VOD). DDI and IDO have announced plans to launch
PacketOne, an always-on wireless Internet service at 64Kbps in Japan.
This should boost the demand for WAP and thus Phone.com's sales in the
region.
We've said before that there is still potential downside in this stock if
the negative-earnings companies continue downward trends. It goes without
saying that if revenues don't grow as fast as expected, the stock gets
crushed because all financial models of Phone.com are predicated on
revenues. Revenue growth has the most impact to the model outputs on this
sheet.
However, based on the recent quarter and on the growing demand for
wireless Internet, we believe this stock is looking more attractive at
these levels. Discounted cash flow analysis suggests this stock is worth
more than $100 if it can live up to current expectations.
Our more conservative numbers suggest $71 is fair value. Phone.com's
carrier growth and recent acquisitions have it well positioned for the
future. It also appears to have the cash necessary to see it through to
profitability (about $7 per share). Based on these factors we maintain a
Buy rating on the stock. |
