Call Up Wirefly

09/30/2005 12:00 am EST

Focus:

"Could InPhonic, which sells wireless phone plans through its Wirefly.com Web site, become the ‘Expedia’ of the wireless industry?" asks Nikhil Hutheesing, editor of the always-excellent Forbes Wireless Report. Here’s his review of the stock.

"Chances are, you’ve bought books through Amazon.com and even booked a vacation through an online site such as Expedia.com. But you probably haven’t yet bought a cell phone and a service plan online. InPhonic (INPC NASDAQ) is the largest seller of wireless phones, plans, and activation service on the Web. Its core business, Wirefly.com, provides consumers with a one-stop online shop where you can compare wireless plans from service providers and choose a plan, buy a phone, activate the service on the phone, and have it delivered to you at your home. The promise: better prices and fewer headaches than going directly through the carrier.

"Buying a wireless phone and getting service is a confusing and often unpleasant experience. Figuring out the various rate plans, determining what kinds of features you need, and understanding the contractual agreements is a hassle. I got to experience Wirefly.com first hand when my son accidentally dropped my wife’s cell phone into the Long Island Sound during a sailing trip. After visiting Sprint, Cingular, T-Mobile, and Verizon Wireless, I logged onto Wirefly.com and got the best deal of all. Simplicity and ease is why InPhonic’s Web business has been so successful.

"The reason that InPhonic is able to offer consumers great deals is that it doesn’t have the overhead expenses involved with running stores so it can pass on the savings and still book margins of 43%. Not surprisingly, InPhonic’s business is growing. Today, about 50% of all phones not sold by the carriers in the US and Canada are activated by InPhonic. It’s a winning situation for carriers as well. For each customer that InPhonic brings to a carrier, the carrier pays about $300—30% less than their average subscriber acquisition cost. Last year, both T-Mobile and Sprint designated InPhonic as their ‘partner of the year.’

"InPhonic is taking its online expertise and expanding it to a wide range of retailers. It is now powering a number of other sites, such as RadioShack.com. Sprint recently turned to InPhonic to build a retail site designed for its special offers. InPhonic already powers about 6,000 private label sites including MSN Mobile, Yahoo, and Circuit City. This year, InPhonic added Overstock.com and PriceGrabber.com, and announced deals with CompUSA, Good Guys, and uBid. In August, InPhonic and America Online partnered to form AOLMobile.com. InPhonic also formed a partnership with Vonage, to resell its voiceover-IP service over the Web.

"The shares started trading in November 2004 when the company went public at $19 per share. The stock traded as high as $28 but and are now below $14, close to their 52-week low. One reason for the stock’s fall is InPhonic’s purchase of its closest competitor last December. For the year, InPhonic is on track to bring in about $350 million in revenue, up 72% from 2004 when revenues were $204 million. The bottom line is also improving. In the second quarter, INPC posted a net loss of $1.7 million, 74% better than its loss of $6.5 million in the second quarter of 2004.

"I expect that the firm will soon become profitable and by 2006, InPhonic should be able to generate earnings per share of $1.10. At current levels, that would place the stock at about 12 times 2006 expected earnings. Considering its potential growth going forward, I think it’s reasonable to expect the shares to trade at 20 times 2006 expected earnings. As a result, I recommend buying shares of INPC and I have a conservative 12-month stock price target of $22 per share. At current levels, the stock is cheap and I believe has a great deal of upside potential."

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