It seems the timing for Boingo (NASDAQ:WIFI) is now or never. Newly IPO’d Boingo is a unique network operator doing business outside the normal model followed by the traditional wireless carriers. Wi-Fi initially became popular with laptop wireless connectivity, but smart phones and tablets are now growing explosively, and these devices all use Wi-Fi for wireless. Although Wi-Fi technology’s success is guaranteed, does that mean the same for WIFI the stock?
Boingo Wireless, Inc., a Wi-Fi software and services provider, operates a network for people to have Wi-Fi access from their laptop or mobile device at more than 325,000 hot spots worldwide. The company has been in operation for 10 years and pretty much dominates the space as a public hot spot provider in the US. Boingo users can access the Internet via Boingo Network locations that include airports, major hotel chains, coffee shops, restaurants, convention centers and metropolitan hot zones, sporting arenas, malls, and convention centers.
Boingo’s revenue comes from a roughly 50/50 mix of retail and wholesale revenue. Although retail subscription revenue grew nicely from March 2010 to March 2011, by about 30.8%, retail single-use revenues were dropping. As a result, overall retail revenues have been fairly flat. Wholesale revenues grew by 26.2% in the same period, and may be the largest part of Boingo’s business in the near future.
The number of retail subscribers grew by 38.4% year over year to 214,000, but monthly churn is a huge 9.4% per month, meaning that almost the entire customer base churns in one year. You can’t directly compare Boingo’s churn rates to those of Verizon (NYSE:VZ) and AT&T (NYSE:T) because they are not burdened with the same device subsidy costs.
Boingo has a lot of competition, some of which is highlighted in its IPO prospectus:
The market for commercial mobile Wi-Fi solutions is competitive and impacted by technological change, and we expect competition with our current and potential competitors to intensify in the future. In particular, some of our competitors have taken steps or may decide to more aggressively compete against us, particularly in the market for venue build-outs of Wi-Fi and distributed antenna system, or DAS, solutions.
Our competitors, many of whom are also our partners, include a variety of telecom operators and network operators, including T-Mobile (OTCQX:DTEGY), Cablevision (NYSE:CVC), Comcast (NASDAQ:CMCSA) and local operators. These and other competitors have developed or may develop technologies that compete directly with our solutions. Many of our competitors are substantially larger than we are and have substantially longer operating histories. We may not be able to fund or invest in certain areas of our business to the same degree as our competitors. Many have substantially greater product development and marketing budgets and other financial and personnel resources than we do. Some also have greater name and brand recognition and a larger base of subscribers or users than we have. In addition, our competitors may provide services that we do not, such as local exchange and long distance services, voicemail, digital subscriber line and subscription television services. Users that desire these services may choose to also obtain mobile Wi-Fi Internet services from a competitor that provides these additional services rather than from us.
Furthermore, we rely on several of our competitors as partners in roaming agreements. The roaming agreements provide that our retail customers and our wholesale partners' customers may use the Wi-Fi networks of our partners. One or more of our partners may deploy competing technologies that could reduce the partner's need to work with us under a roaming agreement. If our partners decide to terminate our roaming agreements, our network of Wi-Fi hotspots may be reduced, which may result in a significant disruption to our business.
In addition to competition from the Verizons, AT&Ts and Sprints of the world, we see increased and intense free Wi-Fi competition. Retail outlets are increasingly providing free Wi-Fi as a service to their customers. This may still be wholesale opportunity for Boingo, but wholesale revenue is typically going to be captured at much lower margins.
With limited audited history to rely on, it seems that Boingo has a reasonable handle on cost control. Its operating expenses grew only 13.2% year over year, while at the same time revenues grew by 13.7% overall. Unaudited data since 2006 shows good attention to critical cost control items such as Selling & Marketing, and General & Administrative costs.
We assess Boingo’s risk level as speculative. On the negative side, most of the time, when I am using my smart phone, there is a free Wi-Fi connection: In my home, office, coffee shops, hotels, and so on. I don’t directly pay for Wi-Fi access at any of these locations, plus my telco carrier is getting more aggressive with data. The competitive risks are very large, and Boingo is a small player in a world of huge telcos. Also, transparency could be better.
On the positive side, explosive growth of smart phone and tablet use is expected over the next few years, growing the overall Wi-Fi market pie rapidly and providing new wholesale opportunities and perhaps new unanticipated revenue sources. There is also a nice upside from the potential for acquisition.
With the company going through rapid change and only a recent history as a public company, we would feel better with a history of several more quarters of audited statements. We hope it will start to break out profitability of retail versus wholesale operations, and give more detail on major revenue sources.
VineSecurityJournal.com’s Proprietary Pricing Model
We assess stocks primarily based on their fundamental value. We estimate the revenue and earnings to be generated by a company over the next 10 years. We look at the risk in the business, the assets and liabilities, and we discount the value of the future earnings according to risk level. For companies with medium to high risk levels, we discount the value of future earnings more aggressively. Our assumptions of revenue growth rates and long term net profitability have a huge impact on valuation. Finally, we compare the value of those future earnings to the stock price. Are the shares “on sale” – or are they expensive?
Our Key Assumptions
Prediction Risk: High
Long Term Revenue Growth: 15%
Long Term Net Profit: 7%
Plugging our assumptions into the model, Boingo’s stock fair value is in the range of $11. At current prices of about $9.50, it seems slightly undervalued at this time.
Some will say these assumptions are rather hard on Boingo. Some will argue that we should have net profit rates above 7%, and higher revenue growth rates, and we will monitor to see that Boingo can do better than that. But competing with free on the retail side will be tough, and competing for business on the wholesale side will probably cause lower margins, so we will stick to our prediction for now.
Boingo could be an acquisition target if one of the large telcos decides to expand its product line. With a market cap of about $660 million, it isn't too large to be acquired.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WIFI over the next 72 hours.