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Despite the Hype, the Wireless Internet Sector
Still May Have Some Good Buys

By David Armstrong   Fox Market Wire
NEW YORK — Investors who missed the initial gold rush for Internet stocks might have another chance to prosper — in the wireless arena.

But don't be surprised if everyone else is thinking the same thing.

The boom in wireless technology — particularly in making the Internet accessible from cell phones and other devices — has created ripe opportunities not just for companies but for investors as well.

After all, the number of wireless Internet subscribers in the United States should reach 15.5 million by the year 2004, up from a mere million today, according to Probe Research, a telecom research firm.

Analysts caution, however, that just as in the early days of e-commerce, unbridled enthusiasm for "the next big thing" could blind some to the risks of a fledgling market.

"When they hear about these wireless Internet businesses, they should step back and think for a minute," said Pat Dorsey, a senior stock analyst at Morningstar. "What are the prospects they are going to see some successes in the coming years?"

Dorsey said every few weeks, a start-up gets plugged as the new Qualcomm, a wireless parts manufacturer that has seen its stock soar in recent months.

"But if you are willing to take on the valuation risk, you might as well buy a solid company like Nokia," he said.

Other analysts also consider Nokia, the Finnish cellular phone maker, a solid buy, although it's hardly an undiscovered stock. At $200 a share, it isn't cheap, but stock watchers say that of the big top phone makers — Motorola, Nokia and Sweden's Ericsson — it's best positioned to survive the volatility.

That's not to say there aren't smaller, less established companies ready to skyrocket from the mass migration to wireless products.

Michael Gallipo, portfolio manager of the Monument Telecommunications Fund, owns shares of Phone.com, which makes a Web browser for wireless telephones.

The small Silicon Valley start-up grew rapidly last year — its revenues of $13.5 million in 1999 were up 500 percent from the previous year. A string of successful licensing agreements with AT&T; and Japanese wireless provider DDI also has fueled Wall Street's excitement.

The stock closed Friday at $160, down from its $208 high a few months ago. Given the drop, some analysts say it might be a good time to buy, despite the relatively high price.

"Given the excitement this whole wireless data market will have over the next couple of years, we expect it to do well," Gallipo said.

Carriers

Two big names in the traditional telephone business — AT&T; and Sprint PCS — also are generating excitement.

Both have separate wireless divisions, with AT&T;'s set to go public this spring. Wall Street is anxiously waiting for that debut, with some analysts predicting it could be the biggest Initial Public Offering ever.

But many believe British Telecom Vodafone AirTouch PLC is the company with the most promise.

After much wrangling, German telecom company Mannesmann has agreed to Vodafone's $198 billion takeover offer, creating the world's largest wireless carrier.

Vodafone also struck a deal with Bell Atlantic, giving the British telecom over 9 million wireless users in the United States. That, along with stakes in other telecoms in Asia, New Zealand and Australia, has positioned Vodafone to dominate the market, analysts say.

Vodafone soon could serve one out of six mobile phone customers worldwide, according to Gallipo.

"They are creating what could be the first globally dominant brand in wireless," Dorsey added.

The stock closed Friday at $58.75, slightly off its 52-week high of $64.37.

Looking to the future, Dorsey also likes Sonera, the former state-run Finnish telecom that went public on the Nasdaq last fall.

Dorsey thinks Sonera will take advantage of the burgeoning market for wireless carriers, simply because they are the leading carrier in Finland, where the number of people using cellular phones nearly equals the number using wired phones.

"Finland is one of the most advanced wireless countries in the world," he said.

Sonera's revenues grew some 15 percent in 1999 from the previous year, while its operating profits soared 26 percent. The company also has major investments in wireless networks in Eastern Europe, and an 8 percent share of the U.S.-based Omnipoint.

In addition, several other service providers across the world have expressed an interest in partnering with Sonera.

"They are really on the cutting edge and there is a lot other companies can learn from them," Dorsey said.

By investing in Sonera, he said, investors are getting not only a "fast company" but a "leading technology provider down the road."

Infrastructure

Infrastructure players — the companies making the equipment and connections that carriers use to move data — also have strong potential, analysts say.

Two of those players — Lucent Technologies and Nortel Network Corp. — are big technology firms with their sights set on dominating the wireless market.

But among the two, Lucent, once a Wall Street favorite, seems to have fallen from its perch. The stock closed Friday at $70, a drop of $14 from its 52-day high.

That plunge came despite Lucent's 24 percent growth in revenues last year to $38 billion.

But analysts believe Lucent misstepped last year when it spent $24 billion to acquire Ascend Communications, a leader in packet-switching technology. The company also issued lowered earnings predictions for this quarter.

"There are some questions about how their business is doing right now," Dorsey said. "Even though (the value) is relatively reasonable, it's not one I would be looking at."

Dorsey, however, likes Lucent's rival, Nortel Networks, even though the company's valuation is high. The stock closed Friday at $120, giving it a market capitalization of some $163 billion. Nonetheless, investors willing to take some risks could do well putting some money in Nortel, Dorsey said.

The Future of Wireless

Kevin Maroni, the managing general partner of Spectrum Equity Investors, a venture capital group, said there are hundreds of companies trying to shape the wireless market, but not all will survive.

As for specific players, "it's too early for anyone to lay claim to victory," he said. "This is at the very early stages."

It will take a lot of time, money and effort to bring traditional companies, along with Internet companies, into the wireless arena. And there still are obstacles of transmitting Internet data over wireless devices.

Among the hurdles are the tiny screen on cell phones and the difficulty of using a standard telephone key pad to do anything more than enter numbers. A company that can figure out a way to easily navigate the Internet considering those constraints should prosper, Gallipo said.

He said a privately held company in Massachusetts, Wildfire, may be up to the task. Wildfire makes speech-recognition software for wireless devices, a developing technology that Dorsey calls "the killer app" of the sector.

With Wildfire's software, a mobile-phone user can use voice commands to sift through e-mail and sort messages. Soon speech-recognition software could allow mobile users to get news or trade stocks without ever touching a key pad.

A spokeswoman at Wildfire said there were no current plans to take the company public — at least no plans that she could talk about yet.

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