Investing in Wi-Fi: Issues and Infrastructure

Guest commentary: In the second part of her two-part look at the Wi-Fi market, Koala Capital president Melanie Hollands discusses some specifics about the players and products that are central to the market.

Medium-term potential for growth and meaningful appreciation in RIMs stock price seems limited, aside from short-term trading range opportunities. Many Street estimates are for stock price appreciation over the next 12-18 months, with some price targets in the high-teens. However, ongoing weakness in IT spending and lingering carrier uncertainty should dampen the companys growth prospects for the next year or so.

The companys cash balance provides a floor to the stock price, with balance sheet cash running at around $7.50 per share. So, this implies that the market is currently valuing RIMs fundamentals at around $6 per share. However, considering our estimates of the addressable market size for push-email devices this valuation seems a bit high, and cash value sounds about right, which makes it a $7-8 stock.

Hand in hand with future device strength goes strength in wireless operating systems. Currently, about 95% of all non-wireless devices worldwide are powered by PalmOS or Microsoft PocketPC. Palm Computing recently announced plans to spin off its PalmSource software unit, thought to happen sometime within the next three to five months.

Buying the stock of PalmSource presents another way to consider playing the longer-term device growth opportunity. However, PalmOS is not, at this stage, technically considered to be "wireless" software. Wireless is a small part of Microsofts current business, but presents a long-term growth opportunity.

A third operating system, Symbian platform, is gaining traction with the handset makers, and is an open operating system produced by the Symbian alliance (a joint venture between Psion and mobile handset giants Nokia, Sony-Ericsson, Samsung, Motorola, Siemens, and Matsushita. Should Symbian conduct an IPO, investors could have an opportunity to get in on the ground floor.