Don't Pass Up iPass

12/23/2005 12:00 am EST

Focus:

With a focus exclusively on the wireless industry, there is no advisor who is more knowledgeable regarding the opportunities in this rapidly growing sector than Nikhil Hutheesing. Here, he looks at iPass, an out-of-favor stock poised for "a great turnaround."

"Ask the analysts on Wall Street these days about iPass (IPAS NASDAQ) and you'll hear a sobering story: This once high-flying provider of secure, dial-up connectivity service is seeing its business erode as high-speed wireline and wireless broadband networks are deployed. With revenue from its dialup service falling, many analysts that once covered this company don't even bother to look at it any more.

"My view is that Wall Street is missing the forest from the trees. Yes, the company's dial-up business is suffering, but its customer relationships are strong and iPass already has a wealth of experience in providing companies with the kind of security and applications they need. iPass leases space on the network of some 300 networks, making it simpler and cheaper for traveling employees to connect to their corporate networks. The system also meets the concerns of corporations by providing robust security software; iPass handles all authentication processes to make sure than any device or individual is authorized to access a corporate network.

"Today, iPass is in the midst of a transition phase, on its way to providing companies with high-speed wireless connections. iPass has already made significant progress in building a vast wireless broadband network. The company has signed roaming agreements with Wi-Fi providers such as T-Mobile, BT Openzone, and Boeing's in-flight Wi-Fi service. I talked to Ken Denman, the chief executive officer of iPass, and he told me that his goal is to have iPass's software working with 35,000 Wi-Fi hotspots by the end of this year.

"Of course, for investors, the big question is when we're going to see the results of the company's efforts in wireless broadband. The answer: most likely in the first quarter of 2006. Then, Wall Street will once again become interested in this company and start recommending the stock. Meanwhile, the shares are trading near their historic low. In essence, you can buy this stock at a near 60% discount to its 2003 IPO price. I think the chance the stock will fall significantly is unlikely. The shares are also cheap on a fundamental basis. iPass has a strong balance sheet with $177.2 million in cash—almost half its market cap. It also has no debt.

"There is another reason too, for why this stock should do well. A previous recommendation in our model portfolio, Intrado, moved up more than 100% thanks to an activist shareholder, Shamrock Activist Value Fund. Well, Shamrock is also an investor in iPass and recently increased its stake in the company to just under 10% of the shares. It's not yet clear what Shamrock will do at iPass, but it is likely that it will push for some kind action by management to enhance shareholder value and unlock assets. Shamrock may also push to have iPass put up for sale or broken up. While I think iPass has a great future without being sold to another company, either way could be beneficial to shareholders.

"I believe iPass is in the midst of a great turnaround. The company is a well-known partner with many of the country's biggest corporations. iPass' problem has been that it provides its superior service over dial-up lines, and that just isn't good enough any more. Today, iPass is developing a wireless broadband network and I believe that as companies turn to this network, shareholders of iPass will benefit greatly. This stock is undervalued and a major activist value investor is making noise. I recommend purchase of shares of iPass at current levels."

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