Investing in WIMAX: Lessons From The Telecom Fallout

WIMAX is a technology that could theoretically offer high speed internet access over a 50 km (31 mile) 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 a city like 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. 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. Let's 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.

ALVR and AIRN 1-yr price performance: