Mobile data offloading is one of the hottest topics in the wireless data industry today. As the mobile data utilization skyrockets, carriers are struggling to keep pace with insatiable user demand for music, video, apps, and more.
The trend is unstoppable and carriers are pressed to implement financially viable solutions. Their dilemma has created immense opportunities for several tech-savvy vendors:
Towerstream (TWER): Shares of Towerstream have already tripled, thanks to its emerging data offloading capabilities. On April 2, the company announced a long-awaited Wi-Fi data offload agreement with a national wireless carrier. In November, the shares traded at a 52-week low of $1.78 in November. They have since rocketed to a 52-week high of $5.86, set on April 2.
This win sets the stage for more in the future. In preparation, the company has been building out its infrastructure, organically and via acquisition. Pipeline Data has tracked the company's progress for several years and believes its management team has what it takes to continue its success.
Alvarion (ALVR): Alvarion appears ready to triple. The company is a leading provider of equipment to enable 4G services and mobile data offload. Incidentally, TWER uses ALVR equipment to deliver some of its own services.
Pipeline Data believe that ALVR will build momentum over the course of 2012. In the meantime, it pre-announced disastrous Q1 results, providing investors with a prime opportunity to get in cheap. The miss was due to three key issues: 1) several traditional equipment deals slipped into next quarter, 2) a multi-million dollar data offload deal in the final stages of approval could not get its final signatures before March 31, and 3) customers / channel partners trimmed inventory in anticipation of a broad Alvarion product refresh, which begins this month.
The company lost 30% of its value on the news. The sell-off was clearly justified, but the magnitude of the move may mark a bottom for several reasons.
For one, Pipeline Data believes that several of the slipped deals have since closed. Further, the new-product rollout is beginning and will continue through year-end. With over $1 billion of installed equipment in the field, ALVR has several customers that can benefit from upgrading their networks. Telmex is an example of one such customer that is already moving forward with an Alvarion upgrade. So, in addition to its new opportunities, ALVR is in-line to see a major increase in its sales to existing/traditional customers in the coming quarters.
Finally, the company has over $50 million in cash on the balance sheet. Our proprietary calculation of net assets yields a figure in excess of $70 million. Meanwhile, the company's valuation is just $37 million. If Q1's burn rate was a long-term issue, this valuation would make sense. However, many of its problems are temporary. In addition, management has committed to make cuts designed to cut its near-term burn rate into the low single digit millions.
Thus, even if investors have to endure another quarter of weak results, they can look forward to a major product and upgrade cycle. They can also look forward to increased data offload momentum later in the year.
At worst, the near-50% discount to net asset valuation will pay investors to wait. However, it's just as likely that investors will take note of the opportunity and quickly drive the shares up to book value. With roughly $190 million in revenue, operating margins of 10% would generate net income equal to half of its current market cap (taxes would be minimal due to a large NOL balance).
From there, a P/E of 5 + net assets would equate to a $165 million valuation. That's $2.63 per share or 4x its current level. This also represents a reasonable M&A valuation - the company holds many patents and has invested well over $100 million into R&D over the past three years.
Every dog has its day, and it usually comes when every last investor has capitulated. That seems to be the case with ALVR. Q1 was the bloodbath needed to lower expectations to a level from which investors can profit. Operationally, there's work to be done. However, products are rolling out and slipped deals are getting Q2 off to a quick start.
At current levels, the stock offers a compelling risk/reward ratio. In addition, a member of its board is closely tied to an activist investment fund. As such, the company could find itself in play. All things considered, shares of ALVR could be poised to triple.
Smith Micro Software (SMSI): Smith Micro may take a little longer to triple, but eventually should. SMSI sells middleware that sits on user devices to enable cellular network offloading. It oversees the seamless movement from network to network, minimizing network congestion. It also manages the various radios in your phone (3G radio, 4G radio, Wi-Fi radio, Bluetooth radio, etc). By only turning on the needed radio, SMSI's offering expands battery life for the wireless device.
This product has already won an eight-figure contract with Sprint, which should unfold over the course of 12 months, beginning sometime this quarter. The win came after an extensive technical and business-case evaluation. According to management, its solution has been offloading about 50% of the usage for Sprint. Further, Sprint's deep dive has reportedly paved the way for SMSI to close more large deals in a quicker time frame.
The company has been servicing major carriers since before the Internet boom. Its reputation and familiarity within carrier organizations gives SMSI a leg up on upstart competitors. It also helps to accelerate its sales cycles.
Financially, SMSI has a $64 million market cap, which is backed by an equal amount of net tangible assets. Thus, investors are essentially paying nothing for the company's past R&D investments which have totaled about $40 million annually.
The shares hit a high of $17 at the beginning of last year, but have since been decimated to less than $2. This is nothing new for the company though. Going back to 1995, Smith has made four round trips from $15+ to the low single digits. Each time the shares have fallen under $2, patient investors have been rewarded with no less than an 8-bagger.
Operationally, the company has lowered operating costs aggressively, from a peak of around $23.5 million per quarter, down to what management believes will be about $15.5 million in the second quarter. Currently, gross margins are in the 70s, but that has a fixed cost component to it. Thus, as revenue increases, so does its gross margin percentage.
At $20 million in quarterly revenue, the company believes margins can hit 80%, generating $16 million of gross profit. Subtracting the $15.5 million of operating costs, the company should re-attain profitability at that level. Meanwhile, cap ex is also being reigned in. After spending $13 million in the first three quarters of 2011, the company cut the number to less than $1 million in Q4. Future cap ex will be mainly be limited to infrastructure to support booked business. Thus, the company's cash outlays should decrease significantly in the coming quarters.
The company appears to have confidence in its future. In November, the board authorized the repurchase of 5 million shares. This program should start kicking in, since the stock has corrected by 33% over the past few weeks. In addition, insider selling has been on the decline and has now returned to historically low levels. 2012 will clearly be a year of rebuilding for SMSI. Similarly, the stock may take awhile to rebound. However, at current levels the shares appear poised to triple for patient investors.
Summary: Data offload is a big trend benefiting small vendors. That combination typically leads to triple digit gains for savvy investors.
- TWER has already delivered and represents a good stock to consider for investors who like momentum.
- SMSI's legacy business was damaged by the smart phone revolution, but it has moved quickly to adjust. Its business should show signs of life later this year, so it's a good pick for patient investors. Everyone else should keep the company on their radar screens - remember, the company is buying back shares.
- ALVR's Q1 threw out the baby with the bathwater. Its business has many catalysts that are happening as we speak, so last week's capitulation may mark the start of a lucrative uptrend. We believe the shares are poised to triple.