Skip to main content
thestreet.com

ARIS MESSINIS

Clearwire and Xohm, the wireless broadband unit of Sprint Nextel , merged in 2008. Clearwire is aggressively building its 4G WiMAX infrastructure, using market clustering in urban areas. Its WiMAX technology offers mobile broadband at speeds often four times faster than 3G. The company's markets include Atlanta, Chicago, Houston, Philadelphia and Washington. Two issues currently face Clearwire: Its first-mover preference for WiMAX may have been a misstep as LTE, or long-term evolution, is emerging as a favoured 4G technology. And expanding, though foreseeable, losses are hurting its stock.

Clearwire's second-quarter loss widened 72 per cent to $126-million (U.S.), or 61 cents a share, from a loss of $73-million, or 38 cents, a year earlier. Revenue surged 93 per cent. Gross, operating and net margins remained in deep negative territory. However, Clearwire has $2.3-billion of cash and $2.8-billion of debt. The company predicts coverage capability for 120 million people by the end of 2010. It added 722,000 net new subscribers in the quarter and posted a churn rate of 3.2 per cent. The recently launched iSpot, compatible with Apple's suite of devices, including the iPad, iPod Touch and iPhone, is a "personal 4G hotspot" likely to attract tech-savvy subscribers in urban areas with coverage.

Clearwire's stock has dropped 9 per cent since its quarterly release. Its 61 cent per share loss missed the consensus estimate of 53 cents. The top-line tally missed researchers' median estimate by 5.8 per cent. However, the real negativity stemming from the quarterly report is the company's announcement of new trials to test coexistence scenarios between LTE and WiMAX. It is purportedly considering a new hybrid technology, which has hurt sentiment for its already capital-intensive 4G WiMAX build-out. However, the threat from LTE remains latent. Clearwire added new wholesale partner Best Buy during the quarter and boosted its 2010 subscriber forecast to 3 million.

Of analysts covering Clearwire, six, or 38 per cent, rate its stock "buy," eight rate it "hold" and two rank it "sell." A median target of $9.01 suggests a return of 46 per cent. Macquarie values the stock at $12, leaving 94 per cent of upside. RBC expects it to gain 62 per cent to $10. Citigroup predicts that it will rise 46 per cent to $9. Analysts' lukewarm position differs markedly from that of the stock's holders. Of the thirty largest investors, 20, including BlackRock, Goldman Sachs and Soros Fund Management increased their positions in the latest period as seven held steady and three lessened their stock holdings.

Intel and Google rank as the largest and third-largest shareholders, holding 15 per cent and 12 per cent of the float, respectively. Clearwire's stock trades at a book value multiple of 3.5 and a sales multiple of 16, premiums to peers. It has fallen 9 per cent in 2010 and 7 per cent in 12 months, lagging indices. Clearwire is targeting $3- to $3.2-billion of cash spending in 2010. It burned through $1.9-billion for operations, capital expenditure and spectrum in the first six months. In order to finance further build-out, a debt or equity offering is likely to be necessary. Management cites a need for substantial additional funding as a major risk.

Although Clearwire boasts the fastest-growing 4G sales, technological uncertainty is prevalent. Proliferation of smart phones and hand-held broadband devices is an indomitable trend, but it seems safer to buy shares of consumer-oriented Apple than to gamble on future network operators. Still, Clearwire's growth and new partnerships are intriguing. The soon-to-be-released Samsung Epic will run on Clearwire's network and a dual LTE/WiMAX network has received support from some tech-oriented analysts who argue that utilizing both technologies may be a sound strategy.

The Sprint EPIC 4G rolls out on Aug. 31. A positive consumer reception may benefit Clearwire shares.

Interact with The Globe