Hedging Your WIMAX Bet

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July 28, 2006 | SIN Picks | | Author Asif

WIMAX is a technology that could theoretically offer high speed internet access over a 50 kms (31 miles) radius from a single base station. In real world scenarios the coverage radius is closer to the 3 to 5 mile range, which is still a big leap when compared to the 300 feet range of a traditional wireless access point. WIMAX is yet to see its prime but its potential is tremendous especially when you consider the significant technical hurdles Philadelphia faces while attempting to create a city-wide wireless network using traditional Wi-Fi standards. Security, interference from existing Wi-Fi networks and the use of the crowded 2.4GHz frequency are some of the problems traditional citywide Wi-Fi networks face.

Intel (INTC) has been pushing hard for the adoption of the 802.16 WIMAX standard and recently invested $600 million in Clearwire, a company that provides wireless high-speed service to consumers. TowerStream is another WIMAX service provider that provides high-speed service at a competitive price to businesses in major cities. Intel plans to roll out the next-generation “Rosedale 2″ WiMAX chip by the end of 2006 and we can expect to see WIMAX enabled laptops sometime in 2007.

If you believed and invested in WIMAX over the last year through pure play WIMAX stocks like Florida based Airspan Networks (AIRN) or Israel based Alvarion (ALVR), you probably took a big hit as this six month chart illustrates. Bigger players like Intel (INTC), Motorola (MOT) and Alcatel (ALA) that have a stake in WIMAX have not fared much better either. The risk of investing early in a new technology was exacerbated in this case by a volatile stock market and revenue recognition problems faced by Airspan with regard to a contract with Yozan Inc, its biggest customer.

Investing in individual stocks does involve considerable risk. Creating a diversified portfolio of stocks across various industries, market caps and geographic locations should help mitigate some of this risk. This knowledge is probably of no comfort to investors in Airspan Networks who are trying to figure out how to recoup some of their losses. Averaging down your cost basis by buying even more shares of Airspan at this “low” price has probably crossed some investor’s minds. The CEO and CFO of Airspan purchased a small amount of stock recently and a director bought some in May. This may be an encouraging sign but there is no telling where the chips may fall until the Yozan contract problems are resolved.

As a rule of thumb it is best to avoid averaging down and it makes a lot of sense as you do not want to put good money behind bad money. There is an opportunity cost associated with averaging down as this newly committed capital could be invested in another stock that may do better. The bigger problem with averaging down is that you will have more at stake now in a stock that is trending down and are likely to spend more time tracking it, researching every piece of information you can find about it and quite possibly losing sleep over it. Since I believe in WIMAX and its future potential, I plan to hold on to my Airspan stock until the problems associated with the Yozan contract are resolved one way or the other. Apart from holding on to Airspan and waiting, there is another course of action that I plan to take to hedge my WIMAX investment. But before I explain this course of action, let me tell you a story.

In 2001, I decided to invest in a telecom company called Allegiance Telecom (ALGX) that along with its competitors McLeod USA (MCLD) and Time Warner Telecom (TWTC) were known as CLECs (Competitive Local Exchange Carriers). Most of these debt laden CLECs lost a lot of money and eventually went bankrupt. However from 2001 to 2003 I believed that ALGX would survive the extreme bear  market and provide an excellent return. The risks were very high but the company had an excellent management team that claimed that ALGX would not go bankrupt unless they were hit by a meteor. The company also had a $500 million credit facility that it decided to draw down and put in the bank.

As the price of ALGX kept dropping, I had a choice between averaging down on ALGX or investing that money in competitor Time Warner Telecom (TWTC). Both stocks were trading at about $1 at that time and I made the mistake of averaging down on ALGX, which eventually went bankrupt. Lets assume I had $1,000 invested in ALGX and I decided to average down with another $1,000. When Allegiance Telecom went bankrupt, I lost close to 100% of my investment. Had I invested the second $1,000 in Time Warner Telecom instead, I would have roughly $16,000 now as TWTC now trades for about $16 per share (without reverse splits). My total return on the $2,000 invested would have been a whopping 700% in spite of ALGX declaring bankruptcy. It was a costly mistake but it did teach me a valuable lesson. Thankfully I did not commit another fatal mistake of staying away from the market after this setback. I went on to double and quadruple some of my investments in companies like Sirius Satellite Radio (SIRI), Priceline.com (PCLN), TD Ameritrade (AMTD), VA Software (LNUX) and Medifast (MED).

Thanks to the expensive lesson learnt from ALGX, I now plan to invest in WIMAX equipment provider Alvarion (ALVR) instead of averaging down on Airspan Networks. Like Airspan, Alvarion is also currently unprofitable and since it is based in Israel, faces risks from the current crisis in the Middle East. However Alvarion has fallen almost 50% over the last six months even though it does not face the challenges that Airspan currently faces and the Middle East crisis is probably already priced into the stock. Alvarion also derives a large portion of its revenue from international contracts and supplies equipment to service provider TowerStream mentioned above.  If the Middle East crisis escalates or there are further delays in the adoption of WIMAX, all bets are off.




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Comments

  1. yang
    July 29th, 2006

    You said CEO and CFO of AIRN bought some shares, I assume you are referring to the July 3 transactions. But a closer look indicates the transaction code is "A". According to SEC’s instruction, "A" means "Grant, award or other acquisition pursuant to Rule 16b-3(d)" So this is not something they purchased out of their own pockets, otherwise the code would be "P". Again, I’m not an expert on securities laws, but I remain highly skeptical this is any demonstration of confidence at all.

  2. Asif
    July 29th, 2006

    Thanks for pointing that out Yang. The purchase on May 22nd by the director Matthew Desch was indeed a market purchase according to Form4Oracle. However even if the CEO and CFO had bought those shares instead of it being a grant, the number was so small that it was not a demonstration of confidence.

    I would certainly like to see some insider buying at this point but if the Yozan issue were to get resolved in the next few days, it could be construed as illegal insider trading. Hence my conclusion that if you believe in the potential of WIMAX, at this point it may be best to start a position in Alvarion instead of averaging down on Airspan.

  3. yearinasia
    January 12th, 2007

    I’m not a big financial expert but I am a WiMax expert and I’d like to point out a few facts.

    The original 802.16 standard targeted fixed broadband wireless, and may be envisioned as a Wireless-DSL. (802.16d)  This uses OFDM with bandwidths of 5/10/20Mhz.  Fixed Wimax can benefit from directional antennas and this is where the bloated ranges come from (e.g. "30 miles").  If you took Wifi equipment and used directional antennas, you could also reach such ranges!  There’s nothing inherently different between Wifi, an OFDM technology which also utilized 20Mhz bands, and WiMax. 

    The new "Mobile Wimax" standard (802.16e), from Oct.2005, tries to turn 802.16 into a mobile device. First off, mobile devices cannot benefit from directional antennas anymore.  Since such devices scatter their radiation in all directions, it is pertinent that the range to the base station will be as short as possible, in order to prevent such devices from contaminating too much an area.  This is the root concept of cellular technology, and it is very apparent that Mobile Wimax is in competition with cellular technology, e.g. HSDPA. Cellular technologies always try to keep their cell ranges to a minimum and it is well known that the cell ranges have dropped from 2G to 3G, and in order to allow speeds of over 1mbps, the cell ranges will be around 1-2 miles at most.  In fact, the WiBro network in Korea which has been piloted in Seoul since April 2006 spaces Base Stations no more than 1 mile apart.  Thus the amount of network infrastructure needed for Mobile Wimax rivals cellular technology and it is very doubtful that any cellular operator will indulge in such an adventure on top of existing 2G and 3G infrastructures which have cost them billions already without justification – who the hell uses 3G anyway?

    Between modem experts today there’s no argument that 4G will be an OFDM based technology.  OFDM is more scalable than WCDMA (the engine of 3G), and it allows to create network protocols that can easily utilize the OFDM breakdown of the bandwidth into discrete channels – as done in WiMax.  However, with greater downlink and uplink speeds, and since no technology today even tries to exceed the 20Mhz bandwidths used by Wifi (WiMax targets 10Mhz bandwidth), the only real solution to allow millions of users to simultaneously download at rates of 1mbps and above is to create a dense network of short-range Base Stations.  An advantage to any 4G network will be the price of such Base Stations.  WiMax Base Stations will cost 10,000$ and above; WiFi Base Stations cost 100$-500$. 

    So which technology is better suited for dense urban coverage of broadband wireless access?  Clearly Wifi. The media spin over WiMax has been saying that "next year will be the year of WiMax" for the past 3 years, and yet companies like Alvarion which dominate the market cannot even make earnings.  Watch out for your investments dear SINLetter…

  4. Asif
    January 12th, 2007

    Thanks for sharing your thoughts about WiMax. If Alvarion and Airspan were only dependent on WiMax sales, I would definitely be very worried about my investments. WiMax accounted for just a third of Alvarion’s revenue in the third quarter of 2006 but the product mix is definitely shifting towards WiMax.

    Regarding earnings, Alvarion is already profitable on a non-GAAP basis and as mentioned in the January 2007 edition of  the investment newsletter, it is expected to post a profit of 14 cents a share in 2007. 

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