Seeking Alpha
CFA, long/short equity, dividend investing
Profile| Send Message|
( followers)  

Last May, ZachStocks published a cautionary article on Clearwire Corporation (CLWR). The company is aggressively building out a new mobile broadband service which has it spending cash by the billions (literally). My concern was that the aggressive spending coupled with operating losses could place the company in a vulnerable position.

While I surely did not expect the credit crisis to become as severe as we saw in the second half of the year, the fears were well-founded with Clearwire. From the time the article was posted until the low in February, the stock dropped a sobering 81%. Hopefully you were able to cash in on some of those profits by shorting the stock.

Now while the company is still cash-flow negative, the stock price has reached a point where it makes sense to re-evaluate holding a short position. We have seen the short scenario played out, and there are now some strong data points that could propel the stock higher. The current market is helping to fuel a bit more investor optimism which will certainly help our growth stock positions.

On March 5th, Clearwire released earnings for the fourth quarter. Losses were tremendous as expected. However, the important data was the information released about the coming quarters. It looks like 2009 and 2010 will continue to be years of aggressive expansion with the company concentrating on rolling out its 4G network. Management expects to spend $1.5 to $1.9 billion this year as the network is built out in many top tier cities.

Specifically, the WIMAX network (which will allow for broadband wireless access across the city) will be launched in Las Vegas and Altanta this summer. This follows what appears to be a successful first rollout in Portland this past January. Later in the year, Clearwire hopes to launch service in Philadelphia and the Dallas/Fort Worth markets.

Now no WIMAX rollout would be successful if it were difficult for consumers to tap into the resources. That is why Clearwire is working hard with companies like Intel (NASDAQ:INTC) to develop devices that make full use of the network’s capabilities. Clearwire expects that by the end of the year there will be about 100 different devices (PDAs, Laptops, Modems, etc.) that are compatible with the WIMAX network.

The cash-burn concern is still worth keeping track of. While the company has resources to make it through the next two years, it will likely need additional capital by the beginning of 2011. I think it is safe to assume that at some point over the next 24 months, the credit (and equity) markets will unfreeze and Clearwire will be able to sell stock or debt to raise that cash. But investors should be aware of this important issue which will hang over the company until the picture becomes clearer.

Further deterioration is unlikely, not just because the stock has dropped so low, but also because of the successful launch in Portland. Even if the company were to run out of cash, they would likely be an attractive takeover candidate as larger top-tier mobile companies could use the partially built network to expand their offerings. So I think at this point the risk has been taken into account and the stock is a better buy than a sell. However, this is an aggressive call and not without significant risk. As always, know your investments and understand the scenarios that could dictate success or failure.

clwr-chart

Disclosure: Author does not have a position in CLWR.

Source: Clearwire: Potential for Improvement