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Making sense of the Strength in DragonWave (DRWI)

 On Friday we saw a strong action in shares of Clearwire (CLWR) and DragonWave (NASDAQ:DRWI).  CLWR closed the day up 10.6% while DragonWave closed up 13.7%.  On the desk there  was a bit of confusion as to why DRWI was up as much as it was so below is commentary from Next Inning Research which clarify’s the situation.

The short story here is that Clearwire (CLWR) is short of cash, but has more RF spectrum than it needs, and T-Mobile is short of RF spectrum. The rumor is that T-Mobile’s parent, Deutsche Telecom (OTCQX:DTEGY), is in talks with CLWR that would deliver it the cash it needs to move forward, and T-Mobile the spectrum it needs to compete more effectively with AT&T (NYSE:T) and Verizon Communications (NYSE:VZ). Shares of CLWR were halted Friday for a while as the news was digested, and after trading was resumed it ended the day up 10.6%.

During its phase one deployment, CLWR used DRWI microwave radios exclusively in the mesh portion of its backhaul strategy. While CLWR also used Ceragon Networks (NASDAQ:CRNT) microwave radios in some of its single link point-to-point applications, I believe if CLWR is successful in obtaining the funds necessary to complete its rollout, DRWI will again be the supplier of choice for the bulk of – if not all – the microwave links. While this would be a huge shot in the arm for DRWI, it is not the foundation of my bullish thesis.

 

The foundation of my thesis is simply that service providers around the world will have to begin upgrading cellular backhaul systems, which today are mostly slow and expensive copper T-1 (E-1 in Europe) or TDM microwave (slow microwave designed to support voice). While direct fiber optic connections will be used in many applications, both short and long-term cost advantages that favor microwave will likely lead to it being the backhaul technology of choice in other cases. As a result, demand for copper and TDM backhaul will fade going forward. However, until that broader trend builds traction, any ripple of good news for CLWR will create a wave of positive sentiment for DRWI.

After taking a glance at DRWI’s daily chart there looks to be room to run up till $9.  I liked the action on Friday and while I have a small long position I will be looking to aggressively buy the dips up on this recent news.  There is also chatter that CLWR could be taken out at some point this year for as much as $15 which should hold up the share price for the near term.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.