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.
Grasping for Growth
Time, cost and complexity are delaying the large-scale infrastructure opportunity. Longer-term, wireless network infrastructure, as well as hardware and security, offer the lions share of growth for wireless vendors and their stock prices. While there is a market for wireless networks, companies are tending to install them as a supplement to a fixed network, this revenue opportunity is several years away.
Considering ongoing economic and business weakness, there is little reason for most businesses to upgrade networks and PCs. Most currently in use were bought in 1999-2000, largely driven by Y2K or Windows NT, and are adequate for running most current operating systems and business applications. For the most part, companies only go for en-masse upgrades of notebooks and PCs to run new software, and no such software seems to be on the horizon.
For now, wireless hardware seems like a pilot effort in larger companies and is probably two to three years away from entering mainstream, large-scale installations anywhere. Longer-term, investors should keep an eye on the larger vendors, including: Cisco, Intel, Dell, Microsoft, Hewlett-Packard, IBM, Sun Microsystems, and IBM. Although they currently have modest wireless offerings, they have yet to reach critical mass and high volumes of sales. Furthermore, there are not yet any convincing market share leaders with depth of penetration in wireless infrastructure and hardware.
Installation of wireless infrastructure and wholesale hardware upgrades looks more and more likely to be a 2005 event. With the dollars required, as well as the extent of equipment required, a company would have to significantly cannibalize other areas of their IT budget to install much of this wireless technology right now. While there appears to be evidence of some increases to wireless IT spending, for the most part this is in proportion with IT increases overall: companies are not cannibalizing areas of their IT budgets to pay for wireless.
However, we should continue to see early wireless adopters on line sooner. 2005 to 2006 seems more likely for widespread adoption with meaningful economic benefits for vendors. We are in 2003 already, and it takes a year to plan and a year for installation, which means 2005 before a system would be up and running for early adopters. The masses are likely to be more conservative, especially since money is so tight.
Security And Cost
Security is currently considered the major disadvantage and risk with wireless networks, with the cost usually ranking a close second — all the more so in companies that dont have easily isolated facilities. On balance, primary decision makers are less concerned with security-related issues than those who made purchasing recommendations. Not surprisingly, primary decision makers are more concerned with cost. In general, those who only made recommendations are more interested in the technologies themselves.
Security issues could also explain why many companies are planning to maintain duplicate wired and wireless networks in the long-term. In this way, wired networks can be maintained for access to certain sensitive applications and data. This also takes into account that most companies would undertake a “phased in” installation of wireless networks, which would likely function as an adjunct to fixed networks before any ultimate replacement.
Relatively few companies are currently planning for wireless LAN to replace a fixed network. Not surprisingly, such companies tend to have more mobile employees, higher needs for real-time/remote access to data, or dispersed facilities (such as medical facilities, educational organizations, distribution facilities, sales organizations, etc.).
For companies that already have a tightly run network with appropriate security in place, adoption would be easier and there would be more equipment to reuse. Best case scenario: if a corporate network (like many) had little security-related data access from different parts of the network, they might need new security hardware and software, and possibly router upgrades as well.
Another positive scenario: companies might already have a managed network allowing them to control access to different pieces of information or applications depending on where in the network the request originated. If thats the case, then blocking from the wireless portions would be relatively easy. There is a high degree of reuse of fixed LANs. In less favorable scenarios, hardware and software capabilities would need to be added at various levels.
Companies need to examine security systems, determine what is and isnt available on the wireless network and consider how to block sensitive data or applications. Depending on the fixed network equipment currently in place, this might involve installing more networking hardware or software.
The Management Mandate
In general, however, securing a wireless access point is not much different than securing (blocking) any other managed switch, hub or node on a fixed network. In terms of stock selection, the wireless security vendors are pretty much the same as those that supply security for fixed networks, including Symantec, ISS Security and Checkpoint.
Flexibility and convenience appear to be the major reasons that companies plan to purchase wireless networks over the next 12 months. While some see more advantages to wireless networks, these advantages tend to be outweighed by the two major concerns outlined above. There are some standout industry-specific preferences; healthcare related companies place great value on less paperwork and real-time access to data, education organizations on improved communications, and financial services on email access.
There is noticeable variation in wireless spending between smaller and larger companies. In general, there is relatively little penetration into small and mid-size companies (<500 employees). Wireless spending by revenues varies, but “small” is probably a better description than “mid-size” for most of them.
Most interest in wireless IT is in the device and WLAN areas. However, this may be related to IT desires more than real company needs. Companies with a low percentage of “mobile” employees, i.e., with most of their employees working in a set place, for set hours, are less likely to buy wireless technologies.
In such environments there is less need for WLAN technologies. In terms of particular wireless technologies, larger companies tend to purchase more from the large-cap vendors like Cisco, 3Com, Dell, IBM and Motorola. This is not surprising, since larger companies are in a position to purchase early-stage wireless infrastructure technology such as Layer 3 Ethernet switches, wireless routers, etc. Smaller companies tend to confine wireless spending to WLAN cards, notebooks and mobile devices.
Melanie Hollands is president of technology long/short hedge fund Koala Capital. She has over a decade of experience covering the technology and telecom sectors from positions in strategic consulting, corporate finance and equity research.