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Larry Dignan
Will investor euphoria for wireless wane?

Larry Dignan
Department Editor, CNET Investor
Monday, September 24, 2001
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Wireless stocks may have enjoyed a boost after the Sept. 11 tragedy in New York and Washington, D.C., but many analysts question whether the run will last.

The nation has seized on wireless phones as potential lifelines during a disaster, such as the terrorist hijackings of four planes and subsequent attacks on the World Trade Center and the Pentagon. Anecdotal evidence from wireless chip suppliers, industry analysts, and retailers suggest consumers may be spending heavily on new handsets and services.

THERE IS ROOM for growth, too. Among consumers, wireless phones have just a 40 percent penetration rate, compared with 60 percent for corporate users, analysts say.

"I think people certainly have the feeling that wireless phones are a self-defense thing now," said Ken Dulaney, a mobile computing analyst at Gartner. "Over time, it just makes sense to own one. Why carry a gun when you can carry a cell phone?"

Since the attacks, investors have flocked to wireless stocks, pushing the CNET wireless index higher this week while other technology indexes fell.

BUT WILL THESE gains last? A number of research reports point to a surge in demand after the attacks, which should help handset market leader Nokia, carriers such as AT&T Wireless, and Qualcomm, a company that licenses its code division multiple access (CDMA) technology in phones.

ABN AMRO analyst Keith Bachman said his spot checks in a host of cities around the country indicate that sales have been at least normal, and in many cases well above normal.

"We believe the surge in mobile phone sales has been driven by consumers who did not previously own mobile phones," he said.

IT'S QUITE A TURNABOUT for an industry that most analysts weren't expecting much from until 2002. A lack of new wireless products and features prompted many industry watchers to reduce forecasts in late 2000 and early 2001. Handset shipments grew 61 percent in 1999 and 47 percent in 2000 before screeching to a halt in 2001. This year, the industry is expected to see a 4 percent decline in shipments, according to Lehman Brothers.

Slowing sales have translated into inventory gluts for most of the major handset makers, hurting quarterly results for companies such as Nokia and Motorola, as well as some of their suppliers.

Wireless shipments chart But now Nokia and companies that supply semiconductors and other parts for wireless phones, such as Triquint Semiconductor, Anadigics, and RF Micro Devices, are indicating that the wireless market is on the upswing. Triquint this week said its earnings would be slightly better than expected. Last week, Nokia said its quarter was on track.

ANALYSTS SAY the current spending on wireless phones may not boost financial results until the fourth quarter--already expected to benefit from a seasonal bounce from holiday sales.

The terrorist attack "is speeding up what we already expected to happen," said Dale Pfau, an analyst at CIBC World Markets.

Lehman on Thursday said it is projecting 97 million handsets to be shipped this quarter and 114 million handsets in the fourth quarter.

While most analysts are in agreement about a jump in wireless sales in recent days, some are skeptical about whether the Sept. 11 attacks have given the industry anything more than a temporary boost.

THE GENERAL THEORY is that the current wireless sales gains can be sustained as features that can take advantage of next-generation wireless networks--so-called 2.5G networks--are incorporated into phones in 2002.

That view, however, is no sure bet. As the economy continues to slump and corporations lay off thousands of workers daily, corporate spending is likely to be curtailed. In addition, cut employees will have to hand-in their corporate cell phones.

"You're going to have to watch the churn," said Blaine Carroll, an analyst at Adams Harkness & Hill.

Some analysts say it's too early to get overly optimistic about wireless companies. If the economy continues to struggle and unemployment grows, demand for wireless phones may slump in the fourth quarter. At the least, current cell phone users may not replace models they already own.

"We remain cautious with regard to the fourth quarter, as the severity of the economic recession could adversely affect the holiday shopping season and the industry's biggest quarter," said Lehman Brothers analyst John Bensche.

Do you think the wireless market will wane? TalkBack to me.

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