Tech Beat: Novatel, Sierra
Even in today’s world of ubiquitous mobile communications, it may be hard to comprehend the magnitude of the wireless industry. During the second quarter of 2007 alone, some 270.9 million mobile phones were sold around the world, according to recent data from Gartner Inc. Today, there are about 2.88 billion mobile subscribers worldwide.
Those phones are becoming more and more advanced. Consumers are increasingly purchasing phones based on third generation, or 3G technology, which, in addition to enabling voice communications, offers ways to swiftly send text, images, and video.
Today there are about 470 million 3G mobile subscribers in the world, representing only a small fraction of total mobile phone users. But the 3G user base is growing rapidly.
Apple Inc.’s (Nasdaq: AAPL) iPhone, which looks more like a tiny television than a telephone, illustrates the trend well. One reason the $600 phone, er $400 phone is so popular is because of its video and other rich-media capabilities.
Other mobile device makers and PC makers are moving in the same direction, adding more functions to their wireless products so that people can not just carry a conversation but accomplish some serious work – or play – remotely.
The trend is reflected in stock values. In the wireless sector there is one, and depending on what date you use to make the comparison, maybe two stocks that have doubled in the past year. Both companies, which make wireless cards and modems to enable 3G mobile communications, are rapidly growing their revenues and signing up new customers.
Sounds good for new investors, yes? Well, maybe not so much, at least as far as Novatel Wireless Inc. (Nasdaq: NVTL) and Sierra Wireless Inc. (Nasdaq: SWIR) are currently concerned.
San Diego, Calif.-based Novatel has seen its revenues more than double in two years on brisk demand for its wireless cards, which support communications at the personal as well as the enterprise level. The company had revenues of $218 million in 2006, up from $161.7 million in 2005 and $103.7 million in 2004.
Novatel has long been profitable but in fiscal 2006 it showed an operating loss and a slim net profit of just $443,000, well below the $11.1 million profit reported in 2005. That drop partly reflected a sharp increase in its R&D and sales and marketing spending.
Investors did not seem to mind. Novatel’s shares are trading around $23.50 at present, up from $9.75 at the start of the year and $11.28 this time last year.
Indeed, net income is growing again. In August, the company reported second-quarter earnings of $8 million, compared with a breakeven quarter a year earlier. Revenues more than doubled to $97.4 million.
With the release of its second quarter report, the company boosted full year forecasts, saying it now expects revenues of $415 million to $425 million, compared with previous forecasts of $380 million to $390 million, and sees net income of $1.25 to $1.30 per share, compared with its earlier forecast of $1.00 to $1.05.
Is there anything not to like here? Some analysts think so.
In July J.P. Morgan downgraded Novatel to underweight from neutral and JMP Securities cut its rating on the stock to market perform from market outperform. In August, JMP reiterated that rating, citing some hidden problems in Novatel’s generally strong second quarter report.
JMP analyst Sam Wilson noted that Novatel’s second quarter domestic revenue fell 14% from the first quarter, partly resulting from one of its largest customers, Sprint, pulling orders in anticipation of the release of Novatel’s new and improved wireless card. Although that new modem is due to be available this month, Wilson cautioned that Novatel could face further volatility during future upgrade cycles.
This is hardly the story of a distressed stock. Some 15 analysts who follow the company are forecasting revenues this year of $419.6 million, and $497.2 million next year, up sharply from $218 million in 2006. Some 13 analysts providing earnings forecast are on average projecting that earnings this year will dip to $1.07 per share, from $1.11 last year, before growing to around $1.20 per share in 2008.
Even Wilson has a $27.50 per share price target on Novatel and says he is bullish on the 3G wireless card market in the long term. But despite recent weakness that has brought the stock down from a 52-week high of $29.14, he warns that there could be more volatility in Novatel’s stock price.
Investors looking for value should sit this one out, at least at current prices.
One of Novatel’s key rivals is Sierra Wireless, a Richmond, British Columbia, company that makes the same type of cards to support wireless voice communications and data transfer on cell phones, laptops and even automobile communications systems.
Sierra’s stock has just about doubled over the past year. Today it sells for around $23.00 per share, up from $13.63 at the start of the year and $11.45 a year ago.
The company’s financial performance has been a bit spottier than Novatel’s. Its 2005 revenue fell to $107.1 million from $211.2 million in 2004, but then rebounded to $221.3 million in 2006. Net income followed a similar path. The company was profitable in 2004 and 2006, but lost money in 2005. Its 2006 net income, also impacted by aggressive investments, was $9.8 million, compared with $24.9 million two years earlier.
Now the company seems to be in a period of smoother sailing. After reporting sharply higher second quarter sales and income, Sierra said that third quarter results would comfortably surpass the prevailing analyst forecasts at the time.
Eighteen analysts follow Sierra and on average they are forecasting net income growing to $1.02 per share this year and $1.25 per share in 2008, versus $0.38 last year. They expect revenues to total $416.7 million this year, and grow to $498.9 million next year, compared with $221.3 million last year.
Unlike Novatel, which suffered some key executive departures over the past year, Sierra has been able to focus on its business with minimal distractions and in June even acquired a rival business, Airlink Communications Inc., for $37.9 million.
That deal, along with the overall growth potential of the wireless industry in June prompted CIBC World Markets analyst Ittai Kidron to upgrade the stock to “sector outperform” from “sector perform.”
“We see Sierra as an excellent and pure play way to tap into the positive outlook for 3G in 2007 and beyond,” Kidron wrote in a research report in late July, when he raised his price target on the stock to $30 from $28.
In August, JMP Securities upgraded the stock to “strong buy” from “market perform.”
Novatel and Sierra are definitely companies to watch closely – from the sidelines. Considering the big run these stocks have already seen, it’s not the ideal time to buy.
