Wednesday morning the shares were tumbling, down over 15% at one point, as two analysts took away their Buy ratings on the stock. The stock had been up 18% through Monday’s close from its first day of trading.
Particularly troubling to some, the 41,000 net subscriber additions was less than some analysts had expected. That figure was down from 52,000 net additions in the first quarter (see the May 8 press release here).
“We were surprised by the level of sequential decline in subscriber growth in Q2,” writes Pali Research’s Walter Piecyk, downgrading the shares from Buy to Neutral. “While management previously highlighted seasonal trends, we incorrectly thought the market opportunity, compelling product and early stage of the company could buck those trends.” And Piecyk expects further deterioration of the company’s prospects based on that slowing of subscriber growth: “In our experience misses for early stage companies might be small in absolute terms but are often red flags of larger issues.” Piecyk says with rising interest rates, and the company not being fully funded, he sees rising risk for the investor and is no longer offering a price target (previously, he had a target of $31). But he offers these thoughts on valuation:
We are perplexed at why the company has not yet raised additional funds and fear that the increased volatility of the capital markets threatens to increase its cost of capital regardless of what quarterly results look like in the future. Our prior $31 target (valuation now suspended) assumed a 25% equity return potential. If we increased the required return to 30% assuming no change to estimates or terminal multiple it would lower our target to $27 and a 35% equity return would lower it to $23.
The best that can be hoped for in the meantime, says Piecyk, is a little pickup when Sprint (S), a partner to Clearwire, talks about details of its Wimax initiative on Aug. 16. But actually, investors might want to pay attention, too, to Sprint’s earnings call Wednesday morning, Aug. 8.
Analyst Christopher King with Stifel Nicolaus, while downgrading the stock from Buy to Hold, is a little kinder, noting that the company continues to show progress, most notably in achieving positive earnings before interest, taxes, depreciation & amortization in its first 25 markets of service. However, “We do not foresee any developments which could drive material near-term outperformance over the next several months, other than continued operational success.” In fact, the catalysts are mostly in the rear-view mirror: a comprehensive long-term roaming agreement with Sprint Nextel, distribution agreements reached with EchoStar (DISH) and DirecTV (DTV), and extending debt maturities out with no significant maturities for the next five years.” The 41,000 net adds was actually better than King expected, but he’s upset with the company’s cost to add new subscribers, which at $471 was $81 more expensive than he anticipated. The next catalysts, judging from King, are going to take a little while to get here:
While we remain believers in the Clearwire business model long term, we believe that many of the near-term catalysts we had expected to drive outperformance have been achieved in recent months, and we now believe stock performance will be driven primarily by operational results over the next several quarters, until results from the 700 MHz auction are known (which may drive spectrum-plays such as Clearwire one way or the other) and a planned mobile-WiMax launch in mid-2008.