Gigabeam: A High-Stakes Gamble on Wireless Bandwidth

| About: GigaBeam Corp. (GGBM)

One thing about small-cap investors – there are always a few who like to take a high-stakes bet. On Monday, July 23, some heavy gamblers placed 8.4 million chips on the stock of tiny wireless data transmission company Gigabeam Corp. (Nasdaq: GGBM) – the number of shares of GGBM that changed hands that day. Gigabeam has only 6.55 million shares outstanding and its market cap is now about $33 million.

After sleeping through most of 2007 at under $3.00, with daily volume rarely topping 30,000 shares, GGBM suddenly soared like a doped cyclist powering up a mountain in the Tour de France. From a $2.80 close on the previous Friday, it jumped to $4.85 on Monday, peaked mid-day Wednesday at $7.06 (a 152% increase from Friday’s close,) and has since coasted back to close at $5.02 on July 31. Its all-time high was $13.80 in April 2006.

The shot in the arm that woke this comatose stock was a press release issued after the market closed on July 20. Gigabeam announced that it had received an order for two dozen of its high-speed wireless data transmission systems from One Velocity Inc., a wireless telecom provider based in, appropriately enough, Las Vegas. Gigabeam CEO Louis Slaughter expanded on the news on July 25 in a conference call covered by, assuring investors that this was a “milestone” event.

Gigabeam will not reveal how much the One Velocity order is worth, but on May 17 of this year, it did announce two “follow-on orders,” one from the Department of Defense and one from “a University in New York City,” that totaled “approximately $350,000.”

The question is whether this medicine is strong enough to save a long-ailing Gigabeam. Since its founding in January 2004 it has never made a profit from its systems. For the quarter ended March 31, 2007, it reported a net loss of $3.1 million on revenues of just $284,142 – one-sixth its revenues of $1.7 million for the same quarter last year (when it reported a net loss of $4.8 million).

Because of its precipitous drop in revenues, Gigabeam has warned in its last two quarters’ financial statements, “There is substantial doubt about our ability to continue as a going concern.” It halved its workforce to 26 people from 53, took out loans and issued stock to survive. Gigabeam was in danger of being delisted for a few months this year when a board member resigned, leaving too few outsiders on its audit committee.

There are no analysts who officially follow the company. But ValuEngine – a research firm that uses quantitative computer models to evaluate stocks based on past performance, projections of future growth, analyst estimates and other financial criteria – issued a report on July 25 giving Gigabeam a fair market value of $6.30 per share. It has a “strong sell” recommendation, projecting it will underperform the market over the next year.

Other than that, Gigabeam is in fine shape. It has perfected equipment to transmit data over high-frequency bands of the radio spectrum (70 to 95 gigahertz) first opened up for data transmission in 2005 in the United States and Europe. Gigabeam had its “WiFiber” systems ready to jump on that bandwidth wagon, transmitting data several hundred times faster than wi-fi, which operate at the now-crowded 2.4 gigahertz and 5 gigahertz bands. WiFiber is also up to a thousand times faster than T1, but slower than fiberoptic cables.

Since then, Gigabeam has announced installations at such places as Trump Towers in Manhattan, Google headquarters in Silicon Valley and Boston University. In January of this year it announced a new strategy to start displacing Wi-Fi and WiMax with wireless connections for entire cities – including Las Vegas.

Although it’s the only pure play in the so-called E-beam spectrum, Gigabeam is not alone. Bridgewave, a private company, also sells wireless E-Beam spectrum systems, and Endwave Corporation (Nasdaq: ENWV) manufactures transceivers for that frequency.

Kevin Dede, an analyst at Morgan Joseph & Co., does not officially follow Gigabeam, but spoke with management late last year when he was at another investment bank. He notes that Harris Stratex Networks, Inc. (Nasdaq: HSTX) a major wireless supplier, has looked at the market but has not jumped in, unsure of the market potential for the pricey systems. Dede shares that concern, estimating the total market size at about $5 million this year.

Harris Stratex, by contrast, reported revenues of $139.0 million and GAAP income of $23.2 million just for the quarter ended March 30. HSTX’s market cap is about seven times March quarter’s revenues, while GGBM’s is 116 times March quarter’s revenues.

This is an increasingly bandwidth-thirsty world, and perhaps Gigabeam will pull a Lance Armstrong and eventually eclipse Harris Stratex as demand soars. But that’s enough of a gamble right now that investors may do better in Vegas. At least they could try out Gigabeam’s system there.

Disclosure: Author has no position in stocks mentioned