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Wireless
ISPs: The Inside Scoop on the Remaining Walking Wounded
While
bullish results this week out of Microsoft [MSFT] and
Yahoo [YHOO] sparked a much-needed rally in the tech
sector, it still wasn't enough to revive many beaten down
wireless service stocks.
Intense
skepticism still hangs over the sector.
After
all, just two weeks ago high-profile wireless data provider
Metricom [MCOMQ] - best known for its Ricochet data
service - finally threw up its hands and announced that it
was filing for Chapter 11 bankruptcy protection.
In its
wake, Metricom left a $1 billion trail of debt and high profile
investors like WorldCom [WCOM] and Paul Allen's Vulcan
Ventures struggling for answers. It got me thinking also.
What does the future really look like for remaining wireless
Internet service providers?
With their
stock prices already decimated- and Wall St. already dancing
on their graves, is now the time to make a contrarian's bet
on wireless ISPs? After all, the world hasn't suddenly decided
to stop Web-enabling Palm and PocketPC PDAs, as well as laptop
computers.
Thus,
I decided to take a look this week at Go America [GOAM]
and OmniSky [OMNY], the two pure play wireless ISPs
still left out in the wireless data jungle. Of course, both
companies are bleeding heavy red ink, but claiming EBITDA
breakeven sometime next year.
We shall
see. Clearly, Wall St. still largely disagrees with these
targets. And Metricom's recent mess hasn't helped any! Let's
put both companies under my analytical microscope then and
see what I found out.
A second
opinion never really hurt anyone.
Go America [GOAM]
A devastated
stock price still hasn't stopped Go America from posting serious
subscriber growth lately and new corporate partnerships. While
Wall St. may have already written GOAM off, road warriors
just can't seem to get enough of the company's wireless services.
The Hackensack, NJ based firm announced earlier this week
that it expects to report over 100,000 subscribers by the
end of the second quarter. If Go America meets this target,
it would represent blistering 40% sequential subscriber growth.
On another
positive note, Go America announced earlier this week that
it is now moving up its target of reaching positive EBITDA
to the first half of 2002. Go America had previously forecasted
positive EBITDA sometime during the second half of next year.
It is also important to note that GOAM's management continues
to believe that the company's business plan is already fully
funded and that it plans to end the year with a healthy $40
to $50 million still in the bank.
While
it is clearly a big positive that Go America is sitting on
a nice cash pile in this type of environment, there are clearly
glaring negatives hanging over this stock as well. And GOAM's
lack of a bottom line isn't my biggest concern. Most discomforting
to me is the fact that GOAM still expects to report negative
overall gross margins this quarter and subscriber revenue
margins that will only be in the single digits. These margins
must improve rapidly over the next few quarters for Go America
to be a long-term survivor.
For example,
in the most recent quarter, GOAM saw sales rocket 450% to
$8 million, but  still
posted an EBITDA loss of $16.5 million. Gross margins checked
in at a lowly 8.4%. Looking at the bigger picture, at a recent
price of $1.70 per share, Go America is now down 90% from
its 52-week high, which leaves the firm trading at only 2
times its projected 2001 sales. While I'm not suggesting that
anyone run out and buy this stock, at these prices Go America
must be looking very attractive to some wireline ISPs, telcos
and hardware manufacturers.
OmniSky
[OMNY]
At least
Go America doesn't have to feel like the only $2 wireless
stock on the block. Wireless ISP OmniSky has also watched
its stock price melt over the past year as its subscriber
base continues to grow. San Francisco, CA based OmniSky ended
last quarter with 39,000 subscribers and projects having 165,000-175,000
by year-end. While Wall St. seems to have already abandoned
the stock, this hasn't stopped News Corp [NWS] from
upping its stake in OMNY to 20% in the most recent quarter.
Much like
Go America, OmniSky still has major issues to deal with in
terms of its gross margins. While the company expects to report
positive pretax cash flow by the fourth quarter of next year,
right now OMNY is still reporting nasty negative gross margins.
As new technologies like Bluetooth pick up, OmniSky
should be able to transition its way largely out of the money
losing modem business, but I remain skeptical of how quickly
this transition will occur.
Based
on OmniSky's most recent guidance, the firm expects to report
2001 sales of between $51-$56 million with negative EBITDA
of between $105-$110 million. While it's easy to get excited
about OmniSky's anticipated 350% annual top line growth this
year, the speed at which OMNY is chewing through its remaining
cash ($90 million) is frightening. OmniSky saw revenue grow
300% last quarter to $5.5 million with an accompanying loss
of $33.6 million.
Clearly,
OmniSky and Go America are both companies trapped in a market
demanding profits "now" - with business models better
accustomed for the days of yester-year (Nasdaq 5000). While
at a recent lowly price of $2 per share, OMNY is also trading
for only a little more than 2 times this year's projected
sales; GOAM looks like the better play at this time. Of course,
"the better play" in this case feels a lot like
choosing between walking on fire or jumping off a bridge.
Steer clear of both and avoid meeting the ghost of Metricom.
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