Soaring Through the Air

10/08/2007 12:00 am EST


Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, finds a wireless infrastructure company that’s ready to take off as a provider of emerging technologies.

Airvana (NASDAQ: AIRV) has been in the wireless infrastructure business since it was founded in 2000. So far, its main role has been providing infrastructure software (which acts as the intelligence for governing and managing the flow of data across networks) to enable wireless broadband service over CDMA networks—a business that I think will continue to rapidly grow.

But now, under its chief executive officer Randy Battat, not only is Airvana's wireless infrastructure business growing rapidly; the company is also positioning itself to become a major provider of emerging technologies.

Airvana's got a great partner—Nortel Networks—which is one of the top providers of this infrastructure equipment with a 25% market share. Nortel incorporates Airvana's software into its hardware and AIRV is the only supplier to Nortel of this software.

Overall, AIRV has sold 30,000 licenses to its global carrier partners. This is a high-margin business, generating margins of about 95% and solid cash flow. The company has a robust CDMA-based business with a 25% market share, and it's only going to grow as demand for wireless data applications rises. AIRV is also on the cutting edge of some new technologies that wireless carriers will soon demand, providing new revenue streams.

Airvana [went public at $7 per share, raising $58 million] in July in a frothy market. But the shares did not perform well, hitting $5.03 per share. One reason for the lack of enthusiasm for the stock was that orders from Nortel, which accounted for more than 95% of Airvana's sales last year, dried up [when] wireless carriers took a breather and slowed their purchase orders to Nortel in the first quarter. Despite the poor first quarter, Airvana is on track to generate revenue of $302.8 million this year, up from $170.3 million last year, [and net income should double.]

On a fundamental basis, I think the shares look attractive. Shares of AIRV currently trade at 12x my earnings per share estimate for 2008. Given the company's position and the prospects for growth, I think it should trade more in line with companies like Nokia and Ericsson.

At 18x projected earnings per share for 2008, that would result in a conservative price target of $9 per share. (It closed Friday just below its offering price of $7.00—Editor.)

Yes, there are risks associated with investing in this company—especially its dependence on Nortel's ability to sell its infrastructure equipment. But AIRV also operates in a fast-growing market and is setting itself up nicely to be a major player in new growth segments of the wireless sector.

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