Sierra Wireless takes a hit
upside.com
Due North
June 22, 2000
by Bob Beaty
When the cops raid a bordello, everyone goes downtown.
One such victim of the recent tech market raid was British Columbia-based Sierra
Wireless (PCS) with Code Division Multiple Access (CDMA) wireless PC cards,
which will allow mobile users to access to their corporate intranets and the
Internet.
Other supply deals in the quarter were consummated with AT&T Wireless (AWE)
and Metricom (MCOM). The total value of the three agreements is approximately
US$84 million.
An exciting future development for Sierra, and indeed many wireless companies, is
the potential adoption by China of the CDMA wireless standard -- needless to say,
a huge potential market. China Telecom (CHL), adding a million signups a month,
has 21 million subscribers currently and said it will adopt the wideband CDMA for
its third-generation mobile phone network. Currently, there is only a 3.4 percent
cell-phone penetration in China.
Through its R&D of a CDMA product for Sprint PCS, Sierra is in an excellent
position to be a major player in Asia. Should the CDMA standard be adopted in
Asia, the Sierra/Sprint product could be rolled out quickly to that market.
Price target of $135
Coupled with the company's organic North American growth, technology analyst
John Safrance of First Associates in Toronto has a buy on the shares with a 12-18
month price target of US$135. He forecasts revenues for 2001 of US$100 million
and can see the company booking US$300 million by 2003. He sees a return to
profitability by the fourth quarter 2000.
The big revenue and earnings kick will come late 2001-2002 when Third
Generation (3G) wireless (voice, data, video) hits its stride. Safrance also expects
that the revenue from deals with AT&T et al. -- slated to begin over the next 18
months -- will be exceeded once the US$84 million guarantees are hit, not to
mention new deals on the horizon.
The wireless stocks led the market up and, to no one's surprise, down. Now that the
froth has been cleanly blown off, market caps have become more rational --
Sierra's dropped from US$2.3 billion to US$625 million -- investors have little
choice than to focus on those companies with great prospects. And something
lacking previously: growing earnings or indeed any earnings at all.
It's ironic that just as Sierra was peaking, increased R&D costs pounded its
earnings. However, the pain should be short-lived and the action proven prudent as
the company stays on the wireless cutting edge as new markets, such as China, open
up.
There is never a good time to take an earnings hit, but the timing, while
unfortunate for investors already stung by the market, will prove more beneficial
taken now than later.
Bob Beaty worked in the investment industry for 20 years in Canada and the U.K.
Since 1995, he has been writing and producing content for some of the best
financial sites on the Internet. He lives with his wife and three children on an
island off the coast of British Columbia. His column, Due North, appears every
Thursday. |
