As I've previously detailed in the article, Straight Path Communications And The Speculative Road To '5G' Commercialization, Straight Path Communications (NYSEMKT:STRP) holds a significant portfolio of mmWave spectrum licenses that could realize significant value amid the upcoming commercialization of the next generation of wireless technology, known as '5G.'
The significance of STRP's holdings is that '5G' will likely utilize extremely high frequency spectrum, known as millimeter wave, in addition to lower frequency spectrum to deliver faster, higher-quality video, and multimedia content and services. The high frequency spectrum will likely be used in combination with lower frequency holdings, small-cell build-outs, and fiber networks to drive data speeds exponentially higher.
The FCC is currently dictating how mmWave spectrum will be integrated into the '5G' framework and the commission's Final Rule puts the 28GHz/39GHz spectrum bands and Straight Path Communications center stage.
As I have also mentioned in my previous articles, I currently hold a skewed (to calls) strangle structure on STRP as market participants have waited for the results of an FCC investigation of how IDT Corporation (NYSE:IDT) (pre spin-off) renewed a portion of their licenses in 2011-2012. This was the primary risk to the underlying security. Now that clarity has been achieved (per below), the market can now focus on if and how mmWave technology could be implemented into the commercialization of '5G.'
THE FCC SETTLEMENT:
Straight Path Settles With the FCC, Now Set to Move Forward with Review of Strategic Alternatives to Maximize Shareholder Value.
· "As part of the agreement, the FCC has terminated its investigation of Straight Path, and Straight Path can now move forward with the vast majority of its nationwide 39 GHz spectrum fully intact, and its 28 GHz spectrum unchanged. Both of these spectrum bands, 28 and 39 GHz, were the recent beneficiaries of a dramatic rule change instituted in July 2016 by the FCC's Spectrum Frontiers Report & Order. The change allows these bands to be used for mobile wireless and is central to the industry-wide push to 5G, in order to provide higher speeds to hundreds of millions of consumers and businesses throughout the U.S."
· "Straight Path will move forward with a full national network of 735 licenses, including deep coverage in major markets, totaling more than 175 billion MHz-PoPs in 39 GHz spectrum, while agreeing to return 93 of its 828 39 GHz spectrum licenses to the FCC. Straight Path will also move forward with all of its 28 GHz spectrum, totaling approximately 39 billion MHz-PoPs, covering many key markets."
· "Straight Path agreed to pay $15 million (fine) in installments over a nine-month period. The company also agreed to proceed with its plan to market its spectrum assets to maximize shareholder value. Straight Path agreed to pay the FCC 20 percent of the value received from a sale of its spectrum assets. If Straight Path does not announce a transaction within 12 months, it will pay another $85 million to the FCC (or return its spectrum licenses to the FCC)."
I believe this to be a very positive outcome pertaining to the FCC's investigation. While there are no "comps" that could provide clarity on mmWave spectrum value, this settlement removes a major obstacle to STRP achieving an appropriate speculative valuation. The market will now dictate what that value is.
As previously mentioned in my initial report:
· As stated in Straight Path's most recent quarterly report, the IDT Separation and Distribution Agreement states, "among other things, that IDT is obligated to reimburse the Company for the payment of any liabilities of the Company arising or related to the period prior to the Spin-Off."
(Does this mean that IDT is responsible for the FCC fines?? I believe so).
· In 2015, US mobile spectrum sold for a median value of $2.71 per MHz/POP. MmWave spectrum will/might trade at a very small fraction of this median value as the supply is higher as is the infrastructure investment.
· However, as noted by STRP CEO Jonas, STRP is a company that "owns 255 billion MHz/POP of spectrum in the US… If we were worth $0.01 per MHz/POP, which would be 270 times less than mobility spectrum, the value of our company would be two and a half billion dollars." This equates to roughly $200 per share. Throughout my research, I have seen valuations that run at 50% less to multiples higher.
(As a result of the FCC settlement, their portfolio is now slightly smaller than that mentioned above).
Also previously mentioned:
Amid all the unknowns relating to this investment, it is premature to focus on a specific price without bidding demand shedding light on a perceived equilibrium. While only Verizon has initiated the mmWave acquisition phase, their "option" to buy XO Communications' assets does not clarify how we should be thinking about mmWave valuation. STRP clearly believes that their assets are worth more than their PPS would indicate and a multi-billion dollar valuation is not difficult to defend. With market forecasts indicating that global mobile traffic will grow 8-fold from 2015-2020, Verizon's competitors or a new wireless entrant could be considering licensed mmWave assets as a central acquisition target for 2017. In response to these forecasts, the Wireless Infrastructure Association noted that, "even under the most optimistic scenarios, the amount of new spectrum coming on line in the next five years is nowhere near enough to accommodate the explosive growth rates Cisco predicts. This underscores the essential role that densification of wireless infrastructure will play in meeting wireless data demand." This past summer, certain STRP executive officers elected to receive a portion of their salary in equity options struck at $50, which further exemplifies the internal optimism in emerging mmWave value. I share these beliefs and I am positioned accordingly.
Disclosure: I am/we are long STRP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am currently long a significantly skewed (to calls) strangle structure on STRP. My profitability will be maximized on a move to the topside while a move lower could provide an opportunity to retain, at least, the premium spent. I also hold a cash long.