Three Ways to Play WiMax

You've probably heard of WiFi. Now get ready to hear a lot about WiMax. The technology works like a stronger version of the more common WiFi wireless communication networks. Unlike a wimpy WiFi hub that peters out a little bit beyond the confines of your local Starbucks, WiMax can turn an entire city into a hotspot.

WiMax is more than just good for geeks; it could be good for your portfolio. Sprint Nextel has bet billions that this technology will help it leapfrog over its larger rivals. On October 20, a United Nations agency endorsed WiMax, improving the chances that more countries around the world will adopt the technology. On October 23, Cisco Systems (symbol CSCO), the leading maker of networking equipment, announced plans to buy WiMax start-up Navini Networks for $330 million.

So how can you make money on WiMax?

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Intel aims to make WiMax mainstream. The semiconductor giant (INTC) plans to sell chips that allow laptop computers to connect to WiMax networks. But that's just the beginning. Intel wants WiMax to spread quickly so that the company can make the silicon guts for all sorts of gadgets, such as cell phones, that would use WiMax networks.

Intel took a similar approach with WiFi, says American Technology Research analyst Doug Freedman. But instead of just making the chips, Intel will likely share in the revenue of telecommunications firms that offer WiMax products, Freedman says. Intel has an equity stake in Clearwire, which builds and operates WiMax networks, and has partnered with telecom firm KDDI to bid on a license for part of the WiMax spectrum in Japan.

"Mass adoption of WiMax is where Intel benefits," says Freedman. "The company wants to capture a certain percentage of the market of microprocessors that are at the core of the products of devices that connect to networks via WiMax."

Because Intel is so well diversified, it is a relatively safe play for investors who think WiMax will be the next big thing in wireless communications. The stock rose 16 cents on October 23, closing at $26.80. It trades at 18 times the $1.48 per share that analysts expect the company to earn next year. Freedman rates the stock a "buy" and thinks the shares are worth $30.

Unlike Intel, Sprint Nextel is the whipping boy of WiMax. Sprint wants to spend $5 billion over the next three years to build a WiMax network with partner Clearwire. But Wall Street analysts are generally down on the stock (S) because the company's new chief executive is viewed as unproven, Sprint's revenues and profits have been sliding, and a turnaround could take years.

But Credit Suisse analyst Christopher Larsen thinks the situation is unlikely to get much worse. "Expectations are low -- although we could still see some downward revisions in earnings estimate, we feel lower revisions are expected and already baked into the current stock price," Larsen says.

Larsen says that Sprint could easily beat reduced earnings expectations if it tempers spending on the venture with Clearwire and lets other companies drive down the cost of WiMax technologies. The stock, which closed at $17.65 on October 23 (essentially unchanged), trades at 20 times estimated 2008 earnings of 90 cents per share. Larsen, who thinks the shares are worth $21, upgraded Sprint to "outperform" from "neutral" on October 19.

The WiMax theme will take years to play out. It will be late 2008 to early 2009 before the technology gains enough users to prove to most Wall Street analyst it can succeed as a commercial venture, Freedman says.

WiMax uses licensed bands of the spectrum, which means WiMax network carriers must seek government approvals. (That's why the nod from the United Nations was helpful to WiMax-related companies.) WiMax has been most widely used in developing countries and in remote rural locations, where putting down cable has often been prohibitively expensive or where traditional communications networks never had a chance to develop before mobile technologies emerged. More recently, companies have adapted WiMax for use with mobile phones.

In the Wild West of mobile WiMax, Alvarion is the pioneer. The Israeli company is the only company currently shipping equipment that is capable of handling mobile WiMax applications without an upgrade, says Irit Elrad-Jakoby, a technology analyst with the Susquehanna Financial Group.

Plus, the company has installed 170 of the 350 WiMax networks currently in use around the world. That gives it a broad base of customers, even though Sprint chose Alvarion's rival, Clearwire, for its major WiMax project. "Alvarion is well-positioned in several markets expected to be early mobile WiMax entrants," says Elrad-Jakoby. "Those include Japan, Taiwan, Russia and Australia."

Alvarion shares appear pricey. The stock (ALVR), which jumped 4.3% on October 23, to $13.73, trades at 46 times the 30 cents analysts expect the company to earn in 2008. But the stock could continue to advance if Alvarion delivers the 27% annual long-term earnings growth that analysts are expecting. Moreover, Alvarion's edge in the mobile WiMax market should help it beat those estimates, Elrad-Jakoby says.