Telecom Equipment Makers Fighting the Spectrum Crunch

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mobile data is being consumed rapidly and in greater magnitudes. As more of the mobile broadband spectrum is sucked up by large telecoms, and the government tightens its grip on the spectrum it keeps off the market, the price of broadband will skyrocket. Even if the entire spectrum was free, it is finite.

Squeezing the most out of existing spectrum to lower costs and increase service is the best use of a telecom company’s cash. Also, WiFi uses unlicensed spectrum, which means fast speeds can come without massive outlays on spectrum. Money spent on WiFi equipment and other customer enhancements gives companies more bang for their buck. But how can investors capitalize on this? We must turn to the downtrodden telecom equipment sector.

Danger First

I am a fan of much-hated company Alcatel-Lucent (NYSE: ALU), because I like its lightRadio product (I have written about it before). It is a little box that can replace big cell towers. Now it is being fitted with WiFi. It uses less power and has a really tight range, not to mention it allows more efficient use of spectrum by keeping consumers off the wave. The sooner mobile data is off spectrum and in wires the better it is for all consumers.

The lightRadio cube can be put anywhere, hopefully cutting down on leasing fees. The cube right now is designed to plug gaps between towers, but if performance improves it might be feasible to cover any dense area. Also, it is possible to meter customers for use of WiFi, with the new gateway-less WiFi that many companies are working on. If telecoms want to offer WiFi in many places in a city a cell tower will be worthless. They will need something like lightRadio, because WiFi is short range. WiFi is also unlicensed, meaning it does not cost nearly as much. Actually, aside from the equipment it costs nothing.

Alcatel-Lucent has some serious headwinds. First, there is an expense problem in the company; it needs to cut down on staff and expenditures. Right now, running low on cash is the number one concern for Alcatel-Lucent, and I do not think it is past the point of no return—but it is getting close. There have been some signs of life, though; Sprint is taking a look at lightRadio. I always see some news with Alcatel-Lucent making deals or getting a new customer. It needs to translate that success into profitability

For Those Who Prefer Safety...

If Alcatel-Lucent scares you to tears, then perhaps it might be prudent to look at Ericsson (NASDAQ: ERIC). It is below $10 too, because no one in this industry can catch a break. Ericsson has its own version of small cells, and they are designing an entire solution around the product. Small cells are just one part of the total solution, but I think it is a critical one. The small cell market is a long way from being mature and massive, but it is growing.

The Ericsson press release claims its total solution, dubbed hetnet, can offer the same level of service for half the spectrum over a multiple vendor approach to a small cell infrastructure. Note the careful wording in that press release. Hetnet has half the spectrum costs if it is the sole solution. I would prefer to see the comparison between it and other technology if those other technologies were the sole solution. A comparison of two pure systems, instead of a pure vs. hybrid system.

Ericsson has ample cash (over $9B), and long-term debt at a little over $3B. Something to look for is for Ericsson's profit margin, which is just at 2%. Seeing that improve would be great. The cash position is my favorite; it really offers Ericsson the flexibility to purchase companies that it needs to bolster its products. I always like seeing a large cash pile, and Ericsson has that. It is not enough to base your whole investment thesis on, but look into the potential of hetnet. The current price seems a bit cheap.

Conclusion

It is hard to recommend Alcatel-Lucent to everyone, but if it turns itself around it will be a big winner. Ericsson is the saner choice. It is also a large company, and I know I have focused on one very narrow segment here, but I think small cells and fighting the spectrum crunch is important. There is also a lot of profit to be made for these equipment makers once telecoms come to their senses and start spending more money.


TheArchivist has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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