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Fast Money in Broadband Wireless? Hardly

By Amey Stone Wireless broadband sure sounds like a great investment theme. After all, everyone wants high-speed Internet access. And erecting a tower and beaming high-speed connections into the home makes a lot more sense than stringing cable or phone lines. New breakthroughs in fixed-wireless technology should deliver on this promise (see BW Online, 5/17/01, "Broadband's Next Wave: Wireless?").

Longer term, we also all want to be able to tap into the Internet at high speeds on the go. Although the so-called third-generation (3G) technology that can deliver the high-speed access to our handheld devices is still problematic, clearly we'll one day be able to reach that goal. "People do not want to have to go find a place to plug into the Internet," says Gil Amelio, the former chief executive officer of Apple Computer who is now with early-stage venture capital firm Sienna Ventures. "We want to have a high-bandwidth experience wherever we are. I'm absolutely positively convinced that is the way the world is going to go."

Nice story. Terrible investment.

SUPPLIER CARNAGE. As promising as wireless broadband is, the arena has been a minefield for investors. Upstart phone companies that built networks using fixed-wireless systems are going down the tubes, including WinStar Communications and Advanced Radio Telecom. Teligent (TGNT) could possibly soon follow. Meanwhile, stronger carriers like WorldCom (WCOM) and Sprint PCS (PCS) are delaying rollouts of their fixed-wireless networks.

That's leading to carnage among the crop of companies that sold networking equipment to these carriers. Stocks of companies like Hybrid Networks, which sold to Sprint, (HYBR), Netro (NTRO), and P-Com (PCOM) are sucking wind as revenues dry up. "These companies are only as strong as their customer base, and the customers for fixed-wireless are dropping like flies," says T.K. MacKay, an equity analyst with Morningstar.

While analysts can point to a few surviving equipment makers, they're essentially identifying the best of a very weak group. DMC Stratix and Western Multiplex (WMUX) both seem to be survivors, mainly because their equipment is used for both fixed-wireless networks and some portions of cellular networks. Kevin Dede, senior analyst at Wells Fargo Van Kaspar, cites P-Com and Ceragon (CRNT) as ones with more risk, but at least some potential upside.

SCALING BACK. Worse off are a newer crop of companies that sold technology, called multipoint, that used a new fixed-wireless technology that hasn't lived up to its promise. Trading in shares of component-maker California Amplifier (CAMPE) has been halted, and Vyyo (VYYO), which makes modems for these multipoint systems, is under $2 a share.

Dozens of once high-flying pure plays are being dragged down while large, more diversified companies that can exit the fixed-wireless arena, including Cisco and Nortel, are now scaling back, says Rich Valera, an analyst at Needham & Co. He sees some promise in the merger of BreezeCom (BRZE) and Floware Wireless Systems (FLRE), two Israeli wireless equipment makers that should gain strength.

Still, investors for these kind of speculative stocks have already been burned once and retreated. "For Wall Street, the word 'wireless' has a terrible odor to it right now," says Dede. He recently got a call from a client wondering if any of these stocks had been beaten up so much that they were good values. But he's still cautionary. "If you time things right and have a long time horizon, the next six months might be a good time to buy," he says. "There are some companies that might do well. Not this year, but next year."

WAITING IT OUT. That's assuming their technology isn't outdone by that of a new crop of upstarts. This is always a risk, but it's a major concern given that new, more advanced multipoint systems are in the works. So far, only venture capitalists have access to these young companies, which seem to have solved some of the problems of high cost and limited performance associated with the public companies' fixed-wireless offerings.

Dixon Doll, managing general partner of DCM Doll Capital Management, was a lead investor in equipment maker NextNet and service provider IPWireless. Amelio says Sienna Ventures has invested in MobileStar, which provides wireless-network services, and wireless networker WidComm, which uses Bluetooth software. "Most of the good wireless-broadband plays are still private companies," he says. "If I were an individual investor, I'd stay tuned."

Once you move beyond the troubled world of fixed wireless, the investment possibilities open up a bit, but there really aren't broadband pure plays to bet on, partly because in the mobile world, broadband access doesn't really exist right now.

10 MORE YEARS. Of the carriers, Sprint PCS, WorldCom, and tiny NuCentrix Broadband Networks (NCNX) are the furthest along in offering broadband wireless service, but they still have to spend a lot to build out their networks. Even when the coming 3G wireless network is built, it won't deliver real broadband to mobile users, says Andrew Cole, head of the global wireless practice at Boston consulting firm Adventis. That Holy Grail may take 10 more years, he estimates.

He thinks Qualcomm (QCOM) has the most direct ties to a mobile wireless broadband future. "Wireless has to go away for Qualcomm not to do well," says Cole. But Morningstar telecom analyst Todd Bernier thinks the stock's price is still too high and faces a lot of technology risk. No kidding, at $65 a share with a price-to-earnings ratio of more than 700.

Bernier's best bet for wireless broadband is the handset makers. It may take a while for the networks to get built and for the technology to change, but he feels confident that users will then upgrade their handsets. He favors Nokia (NOK), which is gaining market share and has strong profit margins, while its competitors Ericsson (ERICY) and Motorola (MOT) are struggling to stay profitable.

SAFER ROUTE. "You have to follow the money and where the profits are made in the industry," says Bernier. These stocks have been able to rise above the bloodletting that accompanied the telecom sector's meltdown.

Sticking with a profitable company is clearly the safer route for technology investors in the current environment. But it's especially true for anyone who wants to bet on a wireless broadband future. While the stocks may look low-priced, the fixed-wireless world is still a potential minefield. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column.

Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum

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