Alvarion: Get On Board WiMax

The only thing worse than picking a bad investment is investing in an emerging technology at the wrong time. When I first heard about WiMax, a technology that could theoretically offer high speed internet access over a 50 kms (31 miles) radius from a single base station, I was so excited by its prospects that I wanted to share my thoughts about WiMax, and specifically Airspan Networks (AIRN), with my family and friends and this was one of the factors that lead to the creation of my SINLetter.

In real world scenarios, the coverage radius for WiMax is closer to the 3 to 5 mile range, which is still a big leap when compared to the 300 feet range of a traditional wireless access point. The large-scale commercial deployment of WiMax did not occur as expected in 2006 and Airspan Networks also got into trouble with its largest customer Yozan, causing the stock to drop precipitously and making it the biggest loser of our model portfolio, with a loss of 33.27%.

Investors had two opportunities to recover their losses in Airspan: either by adding to their Airspan position when it resolved its liquidity issues on July 31st, 2006, or by hedging their WiMax bet through an investment in Israel based Alvarion (ALVR), Airspan's key competitor.

The former action would have netted investors a gain of more than 70%, while the latter action would have netted a moderate 21% gain. While I did start a position in Alvarion for my personal portfolio soon after writing "Hedging Your WiMax Bet", I wanted to observe Alvarion a little longer before adding it to our model portfolio. I believe that the time has come to add Alvarion to our model portfolio and have discussed some of the catalysts that make Alvarion an interesting investment below.

With service providers like Clearwire, Sprint (S) and TowerStream, as well as major equipment manufacturers like Intel (INTC), Motorola (MOT) and Alcatel-Lucent (ALU), on board with WiMax, the question is not whether WiMax will be commercially deployed but when. Sprint has selected WiMax to implement its next generation 4G technology platform and is expected to spend $1 billion on this technology in 2007.

Alvarion's WiMax equipment has been selected recently by telecommunication providers in various countries including Poland, India and New Zealand. TowerStream, a WIMAX service provider in the United States that provides high-speed service at a competitive price to businesses in major cities, uses equipment by Alvarion. According to Barron's, Alvarion may also benefit from the recent auctioning of the 3.5 GHz spectrum in Germany.

Excluding special items, the company broke even with earnings of 2 cents per share in the third quarter of 2006. On a GAAP basis, the company reported a loss of $0.2 million on $54 million in revenue. Year-over-year revenue growth was 20% and the company is expected to post a profit of 14 cents a share in 2007. According to the third quarter 2006 condensed balance sheet (excel), the company had $109.44 million in cash and investments and no debt.

WiMax would really gain momentum after the mobile WiMax standard, also known as 802.16e, is commercially deployed in conjunction with the integration of Intel's mobile WiMax chip named Rosedale II into the Centrino platform in late 2007. Alvarion currently owns more than 50% of the WiMax equipment market and, according to some estimates, their market share is as high as 80%. With units deployed in over 150 countries and dominant market share in the WiMax equipment space, Alvarion is well positioned to benefit from the commercial rollout of fixed WiMax and the adoption of the Mobile WiMax standard in 2007.

Competitors:

Alvarion faces competition from pure play wireless equipment companies like Airspan Networks (AIRN), Aperto Networks and Redline Communications as well as larger companies like Motorola (MOT), Samsung, Nortel and Alcatel-Lucent (ALU).

The Good:

Alvarion currently has a dominant market share with over 50% of the emerging WiMax equipment market.

According to a recent research report by Canaccord Adams, the combined market for fixed and mobile broadband is expected to grow from $1 billion in 2007 to $4 billion in 2010 and Alvarion is well positioned to benefit from this growth.

Excluding special items, the company posted a profit of $2 million or 2 cents per share in the third quarter of 2006 and is expected to report earnings of 14 cents in 2007.

Alvarion is a prime acquisition candidate for a larger equipment provider like Motorola, Samsung or Cisco

The Bad:

Mobile WiMax deployment is likely to occur in late 2007 or early 2008 and until then growth will be primarily driven by rural markets and emerging countries that do not have established broadband infrastructure.

Mobile WiMax faces competition from newer 3G wireless data technologies, like EV-DO and HSDPA, that offer faster transfer speeds on already established cellular networks.

The Numbers:

P/S: 2.06
Cash: $109.44 million
P/E: NA
Long Term Debt: 0

ALVR 1-yr chart