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3 stocks for the wireless future
A geekish plaything is rapidly becoming a gotta-have-it household convenience. Here are the players to watch as wi-fi Internet, TV and music hits the mainstream.
By Michael Brush
Tech-savvy consumers spent more than ever last quarter to put high-speed wireless Internet connections in their homes.
But, if youre an investor, dont worry. This is only the beginning of the wi-fi invasion of everyones home.
These early adopters have typically used wi-fi, which is cheap and easy to install, to split a high-speed Internet connection among multiple computers. That way, family members dont have to fight to surf at the same time, and laptop computers can be online by the pool, on the patio, virtually anywhere around the house. Wi-fi stands for Wireless Fidelity and is a technology that uses high-frequency radio signals to transmit and receive data over distances of a few hundred feet.
But now we're learning that once consumers warm up to wi-fi, theyre looking for other ways to put it to work.
Among the possibilities:
- Broadcasting music anywhere in the house, with Yamahas MusicCAST digital audio server. Everyone in the family can store favorite music in one central location but broadcast it to the speakers they choose.
- Sending tunes from a computer hard drive in the home to a music system in the car, using a system called Omnifi made by the Rockford Fosgate division of Rockford Corp. (ROFO, news, msgs).
- Rigging up surveillance cameras or operating remote-controlled lighting systems.
- Connecting personal computers to printers or other devices, such as video conferencing cameras.
Overall revenue for wi-fi wireless networking gear was up more than 55% in the fourth quarter to $751.9 million, Synergy Research Group, a market research firm, said earlier this month. The consumer sector drove the overall market, increasing about 74% in the quarter to $517.6 million and up 66% to $1.6 billion for the year.
Demand for wi-fi applications is generating healthy boosts to the bottom lines at companies making the chips behind wi-fi technology. Broadcom (BRCM, news, msgs), one of the top communications chip designers, surprised investors last week by bumping up estimated first-quarter revenue growth to 18% over the prior quarter, thanks to growing wi-fi chip demand. In two days, the stock jumped nearly 10% and is up 21% so far this year. Just a few weeks ago, the company was telling investors to expect 10% growth.
GlobeSpan Virata (GSPN, news, msgs), another big player in communications chips, says wi-fi revenue jumped 25% in the most recent quarter from the prior quarter. Its shares are up 36% so far this year. Other major players in the wi-fi chip space, such as Intel (INTC, news, msgs), Texas Instruments (TXN, news, msgs), Conexant (CNXT, news, msgs) and Agere Systems (AGR.A, news, msgs), are feeling the effect as well.
Chips powering wi-fi signals will become more sophisticated in coming months, so you can expect a lot more cool apps to attract a bigger chunk of the consumer-electronics dollar. What was once for computing is now for entertainment and convenience, says Dave Tovissi, the director of custom design and engineering at Tweeter Home Entertainment (TWTR, news, msgs), the electronics retailer. But we are still in the very early stages.
Here are some ways in which the wi-fi world will change.
Wi-fi ready devices: As wi-fi moves even further into the mainstream, wi-fi capabilities will be built right in to most DSL modems and cable set-top boxes, says Larry Ciaccia, head of the wireless networking product group at GlobeSpan Virata. That will help boost sales for the wi-fi chipmakers.
Multiple-signal broadcast: As wi-fi chips become more robust, youll be able to stream several video signals to different outlets around the house simultaneously. The several signals in some cases could come from a single source, such as a TiVo-like personal video recorder, and yet display different programs simultaneously.
Youll be able to put displays all around the home, like a sports bar, says Peter Kempf, vice president of Wireless Data and Networking Components at Conexant. Wi-fi will move from broadband sharing to digital media sharing, as you move the addressable market from people with broadband and multiple PCs, to people with a satellite or cable connection and multiple TVs.
Translation: Wi-fi isn't just for computers anymore. It's also for TV.
HDTV capability: The common forms of wi-fi today arent powerful enough to handle the dense digital signals used in High Definition TV (HDTV), the high-performance standard expected to take over living rooms in the coming five years. But the wi-fi chip makers are busy developing more powerful chips that can handle HDTV. Result: another large source of new demand.
At the moment, the most common form of wi-fi is based on an industry standard known as 802.11b. That means a system can handle about 11 megabytes of data per second. (A typical DSL connection transmits around 1 to 2 megabytes.) Two other standards on the market now, 802.11a and 802.11g, can move around 25 megabytes per second.
Engineers are now developing a new standard called 802.11n. That will carry about 100 megabytes of data and should be enough to handle HDTV, says Frank Ferro, the marketing director for wireless networking at Agere. It should be ready at the end of 2005 or so.
Greater broadcast distance: Intels WiMAX technology will expand wi-fi networks. The semiconductor giant says its WiMAX system will allow broadband delivery of up to 100 megabytes a second over 30 miles. That is 100 times the volume a typical DSL connection can handle. Expected to be a reality in 2005, this technology will go a long way toward helping media companies solve the last mile access-to-the-home problem not just in remote areas but also in cities. The standard is expected to be a hit in emerging markets like China and India, where the cost of putting in high-speed fiber optic networks is high. There is a lot of enthusiasm for it, says Peter Conrad, an analyst with Kopp Investment Advisors and the Kopp Emerging Growth fund (KOPPX), which holds shares in some of the wi-fi chip makers.
WiMAX could also help wi-fi users by making it easier to create "hotspots" -- places that offer free wi-fi access. Today, coffee shops and airports serve as the most common hotspots.
Meanwhile, cell phones will be equipped with wi-fi chips for faster downloads at hotspots, even if they dont use WiMAX.
To be sure, there are problems with using wi-fi in the home. Nosy neighbors who are good hackers can snoop on your e-mail and Web traffic by picking up stray signals (if you don't take measures to prevent it). Home electronics gadgets such as wireless phones, microwave ovens and even plasma TV screens can sometimes interrupt wi-fi signals by emitting signals in the same frequency range.
How to play the wi-fi boom
Investors looking for a clean play on wi-fi chipmakers could experience some interference of sorts, as well. None of the chip suppliers focuses solely on this market, even if it is growing like gangbusters. The main wi-fi chip makers such as Broadcom, GlobeSpan Virata, Conexant, Agere and Intel all sell chips into other hot markets such as storage, high-speed Internet access, cell phones and other communications devices. Heres a quick rundown on the main players.
Of the three biggest wi-fi chip providers -- Intel, Texas Instruments and Broadcom -- only Broadcom really makes sense as a play on wi-fi demand. Intels fate is much more a function of the demand for PCs, laptops and servers. The main drivers at Texas Instruments will be digital signal processing chips.
"Broadcom has more direct exposure," says Kopp Investment Advisors' Conrad. "Even though they have over $2 billion in revenue, wi-fi can be a meaningful driver for growth at the company."
Another relatively focused play on wi-fi will be the company thats formed after Conexant and GlobeSpan Virata merge in a deal that should close this month. The company, which will retain the Conexant name, will get over 20% of its $1 billion-plus in revenue from the sale of chips that go into wi-fi products. The company also will design chips used in dial-up modems, DSL modems and TV set-top boxes. So, the new Conexant will be a powerhouse in the market for chips used in broadband connections.
Agere: a turnaround
Spun out from Lucent Technologies (LU, news, msgs) in 2002, Agere has been in a turnaround. At the end of the fiscal year that ended on Sept. 30, 2003, it reported its first quarterly profit in nine quarters. Besides wi-fi chips, the company sells semiconductors used in storage, mobile phones, modems and networking.
Partly because its still a work in progress, Agere trades at a discount to other communications chip companies by some measures. But given the new chip designs coming out in several areas, including wi-fi, that discount makes Agere look like one of the better plays on the demand for wi-fi-related chips. The shares are up 27% so far this year.
Agere lost market share last year when it failed to bring out an 802.11g chipset, that iteration of the wi-fi chip that helped Broadcom so much. Perhaps as a result, the first quarter of its 2004 fiscal year showed little growth.
But Agere has an 802.11g product coming out this quarter, which suggests it might capture some of the rapid growth behind the strength of Broadcom shares in recent months. And the company said it expects revenue to hit $516 million in its second quarter, up 2.5% from prior estimates. Earnings should be one cent a share.
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